Barnes & Noble: Managing the E-book Revolution

Even as the internet was still in its rapid growth phase, the idea of electronic books was gaining popularity. The comsuming public was already familiar to the idea of downloading digital content in the form of MP3 music files. Big technology firms like Microsoft and Adobe were investing huge amounts in the industry`s future.The EBook sales grew enormously in the past few years, while the physical book sales declined. Rather, from 2009 to 2011, the sales increased from $166.9 million up to $969.9 million. Barnes & Noble is the largest retail bookseller in the United States, operates 691 bookstores in 50 staates. Barnes & Noble College Booksellers, a wholly-owned subsidiary of Barnes & Noble, also operates 641 college bookstores serving over 4.6 million students and faculty members at colleges and universities across the United States.

The company conducts its online business through BN.com, one of the web’s largest e-commerce sites, which also features more than two million titles in its NOOK Bookstore. Through Barnes & Noble’s NOOK eReading product offering, customers can buy and read digital books and content on the widest range of platforms, including NOOK devices, partner company products, and the most popular mobile and computing devices using free NOOK software. The company entered the E-Book market with launching the NOOK in 2010. All along their core business was on sales of physical books.

In this time the company outlasted its long-time competitor Borders. The management of Barnes & Noble had realized its industry fundamentally changed by technological innovation, first by the rise of online retail just as the increased demand for E-Books. Today, Barnes & Noble now stood in an unfamiliar competitive space, faced with well-heeled competitors like Amazon, Apple, Google, Adobe and Sony. Consequently, the challenge for Barnes & Noble is to manage this strong rivalry by making the right strategic decisions.

In the early days of 2012 Barnes & Noble`s top management faced two key strategic decisions that would determine the firm`s future path. First, should they continue to operate both traditional and digital businesses under the same roof, or seperate the digital business so that it could raise its own capital and make business decisions independently? And second, did it make sense to continue to fight Amazon by pursuing a proprietary E-Book solution or should they seek to collaborate more with industry players, such as Apple or Google?

The first step to strengthen its position in global competition was a big deal. In 2012 Microsoft made a $300 million investment in new Barnes & Noble`s subsidiary, includes both digital business as well as its educational college business in exchange for equity and a share of revenue on E-Book and other digital content sales. With the new, major partner the company will battle with Amazon and other big players in the E-book industry. They call it a strategic partnership, with 17.6 percent share by Microsoft and Barnes and Noble takes 82.4 percent. The new subsidiary is officially named as NOOK Media LCC. Barnes & Noble hasn`t had the resourses to keep up with the global expansion of Amazon. While Barnes & Noble`s NOOK appeared with a 27 percent market share, Amazon holds 60 percent market share with their Kindle. Thus, Barnes & Noble decided to cooperate with a rich and powerful technology leader in future.

As part of the joint venture, the two parties have settled their patent ligitation, and the new subsidiary has a royalty-fee licence under Microsoft`s patents for the NOOK. One of the first benefits for customers is a NOOK application for Windows 8, which will extend the reach of Barnes & Noble’s digital bookstore by providing one of the worlds largest digital catalogues of E-Books, magazines and newspapers to a gazillion of Windows customers in the U.S. and internationally. The NOOK app is downloadable from the Windows app store and free to consumers. And vice versa, the Nook e-reading app could also confirm Microsoft’s efforts to establish a digital storefront to market apps, e-books and other content to go along with Windows 8, which is critical for the company’s plans to enter the tablet market. With the availability of NOOK Bookstore on Windows software Barnes & Noble were starting to catch up in competition against Amazon. Furthermore, its educational college business is an important element of the partnership.

The new subsidiary also supports online sales of electronic versions textbooks, in order to follow Apple`s digital book store that support textbooks. In this business the CEO of Barnes & Noble see a profitable opportunity. More and more schools will outsource campus management of digital materials, and that will enable to add more accounts. But already in in 2013 the investment looked like a clunker. Not long after Microsoft’s investment, though, NOOK sales began to decline precipitously. Barnes & Noble`s third quarer earnings were disappointing. Also it is unclear, what exactly Microsoft is getting out of the NOOK partnership. By the way, Barnes and Noble throwed out its CEO William Lynch in 2013. The partnership with Microsoft still exists, but the activity

is not that much at the time. Though Amazon is the most direct competitor to Barnes & Noble, Apple has appeard as a considerable rival as consumers buy iPads and use them to read e-books. It was smart of Barnes & Noble to recognize the market for cheap tablets, and it went on to build more quality devices. By then, other devices, including the iPad Mini, Kindle Fire and Nexus 7, seemed a lot more attractive, largely because Apple, Amazon and Google have much more developed content platforms. Earlier this year, Barnes & Noble announced that NOOK tablets would intergrate with Google Play, but it was already too late. In 2013 the company announced that it will stop manufacturing tablets in-house.

Newsworthy information arrived recently; Barnes & Noble announced cooperation with the South-Korean IT firm Samsung in the tablet segment. Their first common development is named as “Galaxy Tab 4 Nook” and will be available from august in the US. The reader software will be provided by Barnes & Noble and the hardware is manufactured by Samsung. Moreover, both core brands are included. For Mike Husbey, Barnes & Noble`s new CEO, it was essential to collaborate with a global technology leader for the firms path. In an interview he emphasized, that they have been pretty clear in recent times about their strategic intent to seek a high-quality third-party partner for their hardware needs, which would allow them to continue to rationalize Nook and really focus on what they are good at and what they can be competitive at in the current landscape where you have giants like Amazon and Apple and others who are producing tablets. Husbey chose Samsung, because it’s a high-quality hardware manufacturer and he feels confident that they complement each other very well. The partnership with Samsung brings the customers great new products and will growing digital content business of Barnes & Noble.

Due to the outsourcing of the tablet segment the company can concentrate on E-Book manufacturing. The co-branded devices will combine popular Samsung Galaxy Tab 4 hardware with customized NOOK software to give customers powerful, full-featured tablets that are designed for reading, with easy access to Barnes & Noble’s expansive digital collection of more than three million books, leading magazines and newspapers. Conditionally, Barnes & Noble is now with this proprietary E-Book solution on the mend. Henceforth, the firm is in a promising position to compete with Amazon and Apple. Due to the alliance with Samsung, the company allocates resources very smart and thus able to fend off a variety of aggressive competitors.

Also Barnes & Noble has a strong financial position and differentiates from e.g. Amazon in that the relationship to customers is more personal. In addition, Barnes and Noble announced last month to spin-off the NOOK Media division, wich also contains the company`s college bookstore business, by early next year. A retail business for US retail stores and an e-commerce business, including NOOK Media, inclusively all international offered applications. After long, strategic considerations the management decided finally to split its NOOK digital business from its retail business, saying that both entities stand a better chance of being appreciated by Wall Street apart than together. Obviously this decision was already overdue for Barnes & Noble.

Experts and industry`s insiders demand this strategic consideration for long time. To operate with two separate firms would be best solution for the company`s success just as shareholders. Investors initially cheered the move, pushing shares in the company up more than 10% after the announcement. Trigger for this strategic move were the still decreasing fourth quarter revenues in NOOK segment, a 22 % drop over the prior year period. Also the traditional book business is shrinking, but in matter not so strongly compared to digital business. Through continuing with two separated business lines, the digital business could raise its own capital and operate independently.

To sum up, Barnes & Noble have taken some certain actions to strengthen the company`s position in E-Book industry, in order to obviate losing even more market share in digital business. The E-Book industry is a very profitable branch of the economy, which offers attractive opportunities. With appearance of sustainable thinking, consumers would rather utilize E-Book readers and respectively tablets than traditional, physical books. With the new Samsung co branded device, Barnes and Noble has a high quality product and is able to compete against Amazon. The decision focusing on a tablet instead a simple e-reader was very smart. Tablets are serious rivals to traditional e-readers because of the multifunctional use.

Furthermore the college business is very solid right now and has the opportunity to grow. Due to the spin-off of its digital business the company can focus on each activity more closely. The business in retail stores did stabilized so far after years of admission into digital bookselling. However, physical books will always be a popular choice for birthday presents. Barnes & Noble is still world’s largest bookseller with very comfortable rooms and friendly employees. The spin-off will be completed by the first quarter of 2015. With the split into seperated traded companies the management of Barnes & Noble feels confident to improve performance as well as optimizing shareholder value.