It was announced earlier today that Microsoft Corp. is investing $605 million* into Barnes & Noble, Inc.’s digital-book business, their nook digital tablets and eReaders, and their chain of collage bookstores. Once details of the deal were released, I posted a Wall Street Journal link to my Facebook timeline with the caption, “This isn’t great news for B&N stores.” Then the texts, emails, and in-person conversations began. Many Barnes & Noble employees disagreed with me, or misunderstood my comment. Allow me to clarify: I did not mean that this is the end of the ninety-five-year-old company. I also did not mean that Barnes & Noble stores will go away.
The truth is, I’m a tad ambivalent about this deal. From a purely business angle, I love this deal! It makes a lot of sense for Microsoft and it gives B&N the cash they need to grow their eBook presence. However, as a book lover, and bookstore lover, I don’t love this deal.
Yes, a $600 million dollar boost of capital is a great thing for most any company. However, in this case, Barnes & Noble is spinning off their eBook, eReader, and tablet business, which is currently contributing greatly to the income of the company as a whole. One of the things that separates Barnes & Noble from the now defunct Borders is their entry into the eBook market. Barnes & Noble came to the party a little late, but Borders was even later and was turned away by the bouncer. While eBook sales are still a small percentage of overall book sales, nook has given B&N a lot more power in the industry, and has improved the company’s cash flow.
With the Microsoft investment, and the new emphases on nook, they are basically drawing attention away from paper book sales. The further problem is that Microsoft’s interest in this deal seems to be less about eBooks and more about entering the tablet market. While there is strategic value for both companies, they seem to have very different goals in mind. I also see the extra emphases on nook as the first step in closing many of their large stores, and the beginning of layoffs.
Furthermore, the amount Microsoft is paying to acquire its 17.6% stake in the eBook division values the eBook/eReader portion of Barnes & Noble at $1.7 billion. Sure, its big business and that’s just another figure, but think of it this way: The $1.7 billion valuation is almost double what Barnes & Noble’s entire market capitalization was at the close of business Friday, before this deal was announced. It’s also more than the entire company has been valued at since 2008.
This deal will reshape B&N’s business in some ways, but by no means do I think Barnes & Noble stores will go away altogether. However, I do think that over the next three to five years, we will see a reduction of their well known big box stores. I can definitely see a move to smaller, boutique stores (maybe in malls) that mostly sell nook and nook accessories, and probably a few paper books such as best sellers and new releases. Picture a small Apple Store with a bookcase in the back where the Genius Bar would be.
Overall, I do think this is a good move for Barnes & Noble. I think it strengthens their position, helps them better compete against Amazon and Apple, and helps them stay viable for a few more years. But all of this comes at a cost, and I believe that the cost is a reduction in stores that sell paper books, a reduction in the selection of paper books, and a reduction in jobs, at least at the store level.
*The total investment is $605 million over five years, but Microsoft’s initial investment is $300 million.