I love a good bookstore. I can easily spend hours in one, and I often do. There was a happy time, years ago, where I had to chose from the many bookstores in town whenever I had the desire to visit one. Then, Barnes & Noble and Borders moved into town. We know that story. It ends with all of the small bookstores closing up shop. Then, just when I had begun to get used to the idea of shopping in “big box” bookstores, Borders filed for bankruptcy and began closing stores. By the end of 2011, all of its stores had been shuttered. That leaves Barnes & Noble for my bookstore browsing needs. At least for now…
2012 started with news from the now largest bookseller, Barnes & Noble, that they are entertaining the idea of spinning off their eReader device, Nook. Nook is the one thing that has kept Barnes & Noble’s doors open while we watched Borders close all of their stores. The thinking behind it is not necessarily flawed. Barns & Noble wants to attract investors so they can grow and market Nook, but investors are weary of putting money in a company who could just as easily go out of business like Borders did. So, by spinning off the popular Nook (and its accompanying eBook store), you have the chance to attract investors willing to back the nook and eBook business without the attached risk of the “brick and mortar” stores selling paper books.
When I first read that a Nook spinoff was possibly in the works, I thought that by “investors,” the company was talking about larger, corporate type investors, like Liberty Media who last year invested $204 million in Barnes & Noble after a deal to buy the company outright was not reached. But over this Super Bowl weekend, a rumor about a Nook sprinoff emerged that made me wonder just what Barnes & Noble meant by “investors.” The rumor, which Barnes & Noble will not comment on, says that the company is looking into the idea of spinning their Nook business off, not only into a separate company, but into a separate, publicly traded one. I want to make it very clear that this is only a rumor at this point, but there’s something about it that makes a lot of sense, which makes me think that they’re at least considering the idea.
In early 2010, while the full extent of Borders’ struggles were just becoming obvious, billionaire investor Ron Burkle attempted a hostile takeover of Barnes & Noble, citing his feelings that the company was being poorly managed by its Board, and by it’s founder and chairman, Len Riggio. After an expensive proxy battle, Riggio and B&N narrowly avoided a takeover. In the wake of that, Riggio decided to put the company up for sale. Why not just let Burkle buy it? Well, Riggio stated that he thought Burkle was trying to buy the company for much less than it was worth. So Riggio decided to attempt to sell it for a lot more. Problem was, no one else thought the company was worth what Riggio and the Board wanted for it. The best offer came from, of all things, a media company. Liberty Media expressed interest in buying Barns & Noble, but a deal could not be reached, and Liberty instead ended up becoming an investor in the company and now owns a 17% stake.
In my opinion, Riggio is and has been looking to get out, and to make some money while doing it. He already made millions off the company years ago when he forced them to buy a chain of college bookstores which he owned (and initially borrowed money from B&N to purchase in the first place). That purchase, which became Barnes & Noble College Bookstores, is what put the company in debt, and started their management and financial problems. Now, with the closing of Borders, and the growth of the eBook market—led by their competitor Amazon.com—it seems that Riggio knows the days are numbered for old fashioned bookstores.
Anyway, I believe that after seeing that he was wrong about his valuation of the company, and after finding out that the only company that was interested at all was a media company, he now realizes that the only thing of value is the digital business.
I can understand wanting to focus on the most profitable part of your business, but it’s starting to look like Riggio and the Board are actively trying to kill off the brick and mortar part of their business. There is no doubt that eBooks are probably the future of the publishing business, but that doesn’t mean that the traditional bookstore is worthless or dead. If Riggio wants out, he should find a buyer for the stores, even if it’s at a lower price than he initially wanted.
Here’s how I see this playing out: If they spinoff Nook as a publicly traded company, the IPO will raise tens (if not hundreds) of millions of dollars for them to spend on growing and marketing Nook and eBooks for it. Right now, Barnes & Noble sells its Nook devices to stores such as Walmart and Best Buy. Under the new separate Nook company, Nook would likely sell its devices to Barnes & Noble stores as well, treating them just like any other retailer. This means selling the device at wholesale, then allowing the stores to mark up the price. But here’s the problem: right now, Nook is accounting for most of B&N store’s profits because B&N and Nook are the same company. If, as a separate company, Nook sells devices to B&N stores, the stores will only make a very little amount off the device sales. Margins on electronics are tiny. Very tiny.
There’s a bigger problem though. What’s keeping the Barnes & Noble stores afloat is the sales of eBooks and other digital content for Nook. Currently, all of that is sold through bn.com, which is part of Barnes & Noble. In a Nook spinoff, all of that content (and the associated sales), will go to the new Nook company. If you take content sales away from B&N stores, they will not survive. At least not at their current size. The only way they could stay in business would be to move to smaller stores, maybe inside malls, and sell bestsellers, new release, and of course, Nook devices. Maybe even eReader devices from other companies such as Sony, or even Amazon.
Conversely, Nook (the company) would continue to make money mostly from the sale of eBooks, while directly competing with Amazon, Apple, and others for their share of the growing eBook market. Either way, unless eBooks turn out to be nothing more than a bubble, the future of big box bookstores looks bleak. On the upside, maybe we will see the return of intendant bookstores over the next decade or so.