Some Thoughts On B&N’s Nook problem

The news from B&N’s Nook division is bad:

The NOOK segment (including digital content, devices and accessories), had revenues of $125 million for the nine-week holiday period, decreasing 60.5% as compared to a year ago.  Device and accessories sales were $88.7 million for the holiday period, a decrease of 66.7% from a year ago, due to lower unit selling volume and lower average selling prices.  Digital content sales were $36.5 million for the holiday period, a decline of 27.3% compared to a year ago due to lower device unit sales and lower average selling prices.

via Barnes & Noble Booksellers.

I’ve got more sympathy for B&N than some, indeed I think we should be thanking it for spending so much of its investors money to discover some important things for us.

For a time it seemed to me that Nook was a success. Perhaps that was naive of me, but it seemed like a good match, dedicated book people selling digital content to dedicated book readers. The lurch towards tablets was probably not a good one, prompted as it was by the iPad and the Kindle Fire, it might have seemed like a fabulous strategy, but in truth (but sadly in retrospect) it was too expensive and too long a game for B&N to ever win against its much better funded and positions rivals.

The big question for B&N is whether there is a profitable ebook and digital content business to be pulled from the mess of Nook. The shocking drop in digital content sells in the holiday period is blamed on two things, lower device sales and lower average selling prices.

Taking those one by one the device sales driving content sales suggests two things which would be clear to anyone looking in on Nook. For too long, the digital content side of the business has been a slave to the device side. Too little effort has been made to open content sales to those without devices, too little effort on gaining ground on smartphones and tablets other than Nooks.

If the digital content side is to thrive then B&N will have to encourage readers to buy Nook content everywhere and anywhere they can connect to the web regardless of device and to do so more easily than they currently can (which probably means rethinking the company’s current DRM strategy). In some ways the failure of the tablets (and note, I laud even what might be termed a failure here. B&N has still sold a LOT of devices) probably makes this a likely development anyway. Hopefully it will be a rapid one too.

The second issue is a bigger one in many ways. Average selling price is falling across the ebook space (or, at least, it would appear to be). Only increased unit sales will make up for that. However, if B&N is suffering more from this problem than others, not even unit sales will suffice to push it along.

What’s more, if unit sales don’t increase in line with the market, B&N will begin losing market share (if it hasn’t already). It’ll have to either increase its stock of exclusive content (which sounds like an impossible task given Amazon’s attractiveness in this area) or get market share back through converting customers of one platform to Nook readers, or grow quicker than the market as a whole, or by slowing down the flood of exclusive titles that Amazon is building somehow enabling them to capture some of that value.

I’ve written several times about the value of the KDP platform for Amazon and how valuable such a platform could be to the other ebook retailers yet how each of them in their own way has relatively closed policies with regard to them. Since I first wrote about this back in 2011, only Kobo has opened up in a real way. We are seeing the power of Amazon’s foresight in this space now. The giant added 200,000 exclusive ebooks through KDP in 2013, a perfectly avoidable situation.

B&N succeeded in selling nearly $4,000,000 worth of digital content a week in the holiday season, which is nothing to sniff at. I just hope it can push harder and increase they sales in 2014 opening up to wider audiences and starting to challenge Amazon’s exclusivity advantage with self published authors, that would be good for the wider industry as well as for itself.

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11 comments

  1. I believe you’re looking at Nook’s problem from the perspective of an indie author; I’m not sure. But Nook’s problem had nothing to do with DRM. No one has more protection than Kindle. You can’t order from them on an iPad and for the longest time you had to format your books for Kindle devices differently than you did for all of the other eBook readers. DRM is not the issue. The issue is that no one can compete with Kindle when Kindle is willing to sell books, print and digital at a loss. And this loss is sometimes very substantial. They are trying to wipe out the other digital retailers by David and Goliath strategy. They’re just trying to wear them down with forcing them to sell books at a loss also, even though their much smaller company can’t afford to do that; nor should they have to. It’s an unfair disadvantage for any competitor. Amazon also doesn’t make pubic how their company performed in the book area. The Company might be making a profit but it’s surely coming from their distribution fees of other products and from their Amazon Web Services which host servers for many of the major companies, including our own government. The KDP portion of their revenue is not what is making Kindle a growth company. My guess would be the money comes from these other areas and the huge quantities of bestsellers they sell at a loss. This is what is driving their volume and then more people by more Kindles because you can get books less expensively there and you end up having a cyclical problem.
    Steven Zacharius
    President and CEO
    Kensington Publishing Corp.

    1. Hello Steven,

      Thanks for your comment.
      Not being an indie author, I tend not to look on things from that perspective, as a publisher I’m keen for there to be a diverse and healthy market for ebooks rather than just one massive monopoly, so I’m very eager for B&N to succeed with Nook.

      On the other hand, I tend to be a little more out of step with many of my publishing colleagues on ebook thinking.

      With regard to drm, for Nook the problem isn’t drm itself (I don’t like it, but it’s not generally a problem) but the way B&N and Nook have chosen to implement their form of drm making it hard for people to buy their books on devices other than nooks and hard to side load ebooks bought on other platforms. It isn’t an exclusive issue for B&N, but Nook could add users by making such things easier. It’s a business case, not an ideological one.

      I don’t like Amazon’s drm, but it’s a different case and serves Amazon nicely enough and suits authors and publishers. The reason you cannot buy Kindle ebooks on iPads (other than via the website, its only in-app purchasing that’s disabled) is Apple policy not Amazon DRM.

      As for Amazon’s strategy, yes it’s a tricky company to compete with. Yes it probably cross supports its weaker divisions with its stronger one (as any retailer or indeed any company does) and yes it is aggressive. All that said, competing with it isn’t impossible and its success is no more guaranteed than any other company’s is. One thing it gets right is attention to what the customer wants, we publishers could learn something from its level of obsessiveness in that regard!

      Eoin

      1. I agree that Amazon has great customer service even though they don’t make it easy for you to find a customer service number on their site….but their service is the best. But how do you think any company in the digital field can compete against them if they’re willing to take a substantial loss on all bestsellers being sold….way below their cost? How many companies can afford to sell their bestsellers below cost and stay in business for more than a few months? What happens once the other ebook players have decided there are no longer any margins left in the business and you’re left with just Amazon?
        Interestingly enough, one entire morning at DBW Conference is a discussion on dealing with Amazon.

    2. Selling best sellers at a loss does not mean Amazon isn’t profitable selling ebook overall.

      Selling ebook is a profitable business for Amazon.

      1. How can you make that statement? Amazon/Kindle doesn’t release any sales information by product line. They won’t even tell how many Kindle’s have been sold. I would be willing to say that I’m sure NYT Bestsellers is an enormous chunk of the Kindle business. Obviously I couldn’t give any percentage since they don’t share any of this information. But if you’re selling the bestsellers at huge losses, then you have to sell an awful lot of other books to make the company profitable. Amazon didn’t show a profit for a long long time and their margins are still razor thin. A huge amount of their revenue is from distribution of other products and from Amazon Web Services which they very rarely talk about.

  2. This is so true! I don’t have a Nook, but my Windows 8 laptop came with the app so I bought one of my own books just to check out how it looks. It wasn’t that easy to figure out how to use it! When I tried F1, nothing happened, so I went to a browser and found their online help file; the directions assumed I had a touch screen,which my laptop does not have. I finally stumbled over the right click function, which shows you the menus. It was actually OK to use, once I knew that, but seriously, not everyone has a Surface!

    On the DRM issue, it’s worth noting that both Amazon’s KDP platform and the Nook Press platform allow the authors to opt out of adding DRM to their books. It’s not fair to blame DRM on the retailer/device maker.when mostly it’s publishers who insist on it.

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