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How Agency Pricing Helped Barnes and Noble Gain a Foothold in...

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On June 21, 2011, BN happily announced $7 billion in sales due, in part, to a 50% increase in sales at BN.com.  The WSJ’s lead in the July 20, 2011, article is “Meet Barnes & Noble Inc., software company.”

The original nook was announced in October 2009 and released in November of 2009.  At that time, it was estimated that Amazon held 45% of the ereader market but sales wise, speculation was that Amazon comprised 70%-90% of the digital book market. The market of digital books was less than 2 % of overall publishing sales in 2009.  But Amazon’s $9.99 pricing was viewed as dooming the publishing industry.  In comes Apple. Steve Jobs famously told Walt Mossberg of the Wall Street Journal that publishers were going to pull their books from Amazon unless Amazon sold the books at the price that was reflected in the iBookstore.

In March 2010, Macmillan opened the first salvo, refusing to allow Amazon to sell books at the price set by Amazon.  Instead, Macmillan wanted to set the prices.  Amazon responded by pulling the buy buttons for all Macmillan books.  But after the weekend was over, Macmillan prevailed and soon thereafter all of the Big 6 but Random House adopted what we now call Agency Pricing.

But it wasn’t Apple and the iBookstore that was the beneficiary of Agency pricing and it wasn’t small independent retailers like Books on Board or Kobo.  The major beneficiary was Barnes & Noble.  At the end of 2009, retail book sales were plummeting.  B&N had already started to replace some of its book inventory with Toys & Games. In previous quarters, B&N was reporting a consistent pattern of brick and mortar retail loss.  (-4.8% in 2010; -5% in 2009*; -5.4% in 2008)

On August 31, 2011, B&N announced it’s first quarter 2011 results.

Barnes and Noble retail sales went from 28.8 percent of the company’s gross margin to 29.5 percent. Barnes and Noble website sales went from 3.7 percent of the company’s gross margin up to 27.3 percent compared to the same period last year. Gross profit from Barnes and Noble’s website went from $5.3 million in the first quarter last year to $41.5 million.

Retail sales fell 3% but digital sales have gone through the roof.  According to B&N, the majority of those digital book sales are Agency priced books along with PubIt! revenue.

Currently, B&N claims 27% of the digital book market.  One investor said of B&N:

The Nook is “the only driver of long-term growth and they have to establish that niche,” said Souers, who recommends holding Barnes & Noble shares.

This was born out in the last quarterly results:

Sales through BN.com increased 37% ….  This increase was driven by strong demand for the NOOK product line, including the continued success of the Award Winning NOOK Color, the mid-quarter launch of the NOOK Simple Touch Reader and a quadrupling of digital content sales over last year’s first quarter.

Barnes & Noble store sales decreased 3%….  While traditional physical book sales declined during the quarter, the stores posted large increases in sales of the NOOK product line and Toys & Games.

The consolidated NOOK business across all of the company’s segments, including sales of digital content, device hardware and related accessories, increased 140% in the first quarter.

It’s capital investment to remake itself into a technological company is costly.  Despite record sales at the end of the fiscal year 2010 (ending April 2011), it also suffered net loss of $74 million due to nook R&D.  The 4 year trend doesn’t look good in terms of net results.  However, the sales at BN.com have gone from  $466 million in 2008 to $858 million in 2010.  Now BN.com sales are nearly a 1/3 of its overall revenue, matching that of the revenue pulled in by its retail stores.

The suppression of Amazon’s ability to use ebooks as a loss leader allowed B&N to enter the market in late 2009 and capitalize on Agency pricing. B&N did not have to compete on price of ebooks, a move that would have undoubtedly increased its losses exponentially.  Instead, B&N focused on providing the emerging ebook market with a touch screen color ereader. Amazon will meet that this year, but B&N has gained a strong market share while Amazon was satisfied with its eink offerings.

B&N didn’t exactly take market share away from Amazon. Instead, as the market grew (some say it doubles about every three months), B&N attracted new entrants by virtue of its brick & mortar retail advantages and its fancier digital readers: touch screen eink and color LCD reader.  Plus, its books were the same price as Amazon’s.  B&N didn’t have to cut its ebook prices, offer discounts, or even include digital books in its loyalty program.  Agency pricing helped B&N focus its precious capital on making a better device and advertising the Nook heavily instead of having to suffer a loss on every book sold, as Amazon was doing with its $9.99 loss leader strategy.

B&N still faces stiff competition.  Amazon has a market cap of $98 billion and B&N’s market cap is $1 billion.  B&N has suggested the capital expenditures may double in the next year.   Liberty Media’s investment into B&N is designed to respond to this need.  One of the largest problems B&N will have is its current geographic limitations.  Amazon is a worldwide company that is challenged by Sony and Kobo in the non US market.  B&N’s international moves haven’t full realized yet.

Even if Agency pricing disappears in 2-3 years because of lawsuits (which I expect that it will), B&N will have been given a window of opportunity to transform itself not only into a technology company, but a profitable technology company.  I submit it couldn’t have been done without Agency pricing.

 

*In 2009, BN bought College Booksellers and changed the fiscal year.

Jane Litte is the founder of Dear Author, a lawyer, and a lover of pencil skirts. She spends her downtime reading romances and writing about them. Her TBR pile is much larger than the one shown in the picture and not as pretty. You can reach Jane by email at jane @ dearauthor dot com

26 Comments

  1. Statch
    Sep 04, 2011 @ 08:29:06

    Jane, this was a really interesting analysis. Thanks for posting it! I’m happy to see you say that you think Agency pricing will eventually disappear, but I see your point about it helping B&N focus on things that make it a stronger company, which is good for all of us.

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  2. Sunita
    Sep 04, 2011 @ 08:35:52

    Great article, Jane, and very interesting analysis. It seems as if it’s an example where having a set, predictable price has two effects: (1) the company knows exactly what its returns (per sale) will be, so it can forecast better; and (2) since prices don’t vary, buyers discriminate in other ways. B&N offered various in-store options (free wifi, lots of e-browsing) that Amazon couldn’t.

    Overall I still think Agency pricing probably hurt more than it helped (e.g. we don’t know if companies chose not to enter the market because of it), but it’s nice to think there was at least one benefit.

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  3. Merian
    Sep 04, 2011 @ 08:43:40

    I also think that for international book buyers (i.e. non-USAian) the agency pricing is buried in the geographic restrictions and normal higher pricing that we face so hasn’t had as much impact.

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  4. LG
    Sep 04, 2011 @ 08:44:08

    I wonder if anyone has ever looked at how many of the people who buy a certain e-reader also buy their e-books from the company’s store? I have a Nook, but I certainly wasn’t part of B&N’s e-book sales numbers – I haven’t spent a dime on their e-books. Instead, I buy all my e-books from ARe (the majority) and the publishers (much smaller percentage).

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  5. Janine
    Sep 04, 2011 @ 11:10:24

    Terrific article. It’s ironic that Apple was meant to be the beneficiary of the new pricing strategy but instead it was Barnes & Noble. I’m wondering though how Amazon’s market share changed over that same time period? Since you say that “B&N didn’t exactly take market share away from Amazon,” does that mean that Amazon’s market share stayed close to what it had been before or that it grew?

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  6. Christine M.
    Sep 04, 2011 @ 12:12:40

    @LG: Maybe it depends on the reader one buys? I have a Sony reader and except for the voucher I received when I bought my 600 ($20 to be spent in tihe Sony bookstore) I never spent a penny on that website. All my books come from other sources.

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  7. Barbara
    Sep 04, 2011 @ 12:27:52

    BN’s ebook selection sucks. I bought my Nook initially because I was tired of reading locked ADEs on my computer (I know, silly reason, but I have a lot of them), but I barely even shop at BN.com because they have almost nothing to offer in terms of ebooks. My Nook is filled with things from Fictionwise, eHarlequin and Galley Grab. If they plan on competing with Amazon, they’d better hurry up and start offering a better range of books and try putting them out when they’re released. I can’t even count how many books I’ve tried to find on release day that they didn’t have.

    I was in BN last weekend and was so tempted to sit in their comfy little Nook area and pull out my Kindle. :)

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  8. library addict
    Sep 04, 2011 @ 12:45:59

    @LG: I tend to buy all of agency books at Sony as well as some other books. And I always use their coupons (which are few and far between). The thing I like about Sony is the Agency books I do buy are available at midnight eastern time on release day, at least the ones I’ve wanted have been.

    But the main reason I purchased the Sony was the ability to shop around. So I also buy directly from publishers (Carina, Samhain, Harlequin) and at Kobo and ARe. And I used to buy ebooks at Borders before they closed.

    I know many dislike Sony’s website and agree 100% it needs improvement, but I’ve never had any trouble shopping there. And their customer service has been very good to me when there are issues with books (such as really poor formatting, etc).

    I think Amazon has by far the best search feature on their site. It’s not perfect, but it’s much better than any other site’s I’ve been too.

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  9. Devon Matthews
    Sep 04, 2011 @ 13:05:55

    I’ve never bought a single ebook from B&N, even though I have an account and a book for sale there. It’s their web site. It stinks. They need to add more bells and whistles to attract customers and keep them browsing once they get there. Plus, it’s slow. The B&N site is like a lumbering dinosaur compared to Amazon.

    If Agency pricing goes away in 2 or 3 years, as you’re predicting (and I believe you’re right and that it might happen even sooner), what’s this going to do to the Indie market? Will the pendulum then swing back and take us into another era of publishers rule?

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  10. Kim
    Sep 04, 2011 @ 14:52:29

    It’s amazing how ebooks pushed Borders and BN in 2 different directions. What would have happened if Borders had come out with an ereader earlier? Would it still be in business or was it so seriously mismanaged that nothing could save it?

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  11. Dawn
    Sep 04, 2011 @ 15:02:50

    @Devon Matthews: They need to add more bells and whistles

    Um, NO. I continue to browse B&N because there’s not a lot of other garbage on the page.

    Then I buy elsewhere because they made their membership card a joke. I got a renewal notice a while ago. It said, “For $25 a year, we’ll give you a couple bucks off an ereader you don’t want, free shipping that you would get anyway because you never spend less than $25 at a time on books, and full cover price on the books you want the way you like to purchase them. Renew today!”

    I declined.

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  12. Devon Matthews
    Sep 04, 2011 @ 15:30:01

    @Dawn: So we have differing opinions on the bells and whistles. I never browse B&N because it’s so static. On the other hand, I spend a lot of time on Amazon where one thing leads to the next, and the next, etc. I’ve found a LOT of good books that were within my interest range because of all the “garbage” they have on the page.

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  13. Shiloh Walker
    Sep 04, 2011 @ 15:37:54

    @Devon Matthews:

    Eh, I’ve gotta agree with Dawn… I don’t want bells and whistles when I’m shopping for books. I want books. I know how to find what I’m looking for and I don’t want anything interfering, I don’t want anything distracting me. I want to find my books and buy my books.

    My ebook buying is almost always done at BN-I used to have a Nook, but I gave it to my daughter, now I use a Nook app on my Samsung tablet and I love it.

    Personally, I think the Nook is the best ereader out there-the Kindle has never appealed to me-too many buttons, too much to distract me. I want to read. I don’t want to push buttons and type on my reader.

    If I hadn’t gone with the Samsung tablet, I would have grabbed the Nook color in a heartbeat.

    This was a very interesting post to read…I’m curious to see what the next few years will bring.

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  14. Jaclyn
    Sep 04, 2011 @ 16:31:54

    @Kim

    Many people in publishing believe that Borders was so mismanaged that nothing could save it.

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  15. Darlynne
    Sep 04, 2011 @ 17:38:05

    @LG: I’m one of the people who buy primarily from B&N for my Nook. Although I purchased much more from Borders because their discount coupons were valid on non-agency digital content, I like the wifi capability of the Nook via B&N and everyone gives me B&N gift cards for presents. I do not, however, buy as much as I used to, just the authors I choose to support in spite of the Big 6.

    As an agency-pricing hater, I’m kind of miffed that anyone (with the exception of authors) could have benefited from such a bad idea. I’ll be standing at the gallows, torch and pitchfork in hand, when (not if, when) Apple and the other unholy participants are led to the scaffold for hanging. Or maybe marshmallows if there’s burning instead.

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  16. Tripoli
    Sep 04, 2011 @ 17:51:09

    I love the look of the Nook color, but the Amazon store is so much better organized than BN’s. For instance, if you want to find m/m romance, good luck finding that categorized at BN. It might be there, but it’s not easy to find. Books from smaller digital publishers get lost because the clear preference is given to big-name romance authors and their NY pubs. Their free books also leave something to be desired. When the Amazon tablet comes out later this year, that might be the game changer that will cement Amazon’s dominance. However, I’m loving this competitive marketthat is driving down the price of e-readers and opening up possibilities for authors.

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  17. Kaetrin
    Sep 04, 2011 @ 19:54:25

    Interesting article Jane. It just fortifies my view that Borders could have survived the ‘digital revolution’ if it had had better insight into the market and better management.

    Re Agency Pricing (sorry, a little off topic) – I searched for Laura Griffin books on Saturday and saw they were $7.99 (plus tax – grrr) at Books on Board due to Agency Pricing. I looked for the same books over at Amazon and picked them up for $6.39 each (and no tax) as kindle versions. I thought Agency books couldn’t be discounted. I guess the moral of the story is that it pays to shop around no matter who the publisher is…

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  18. Jane
    Sep 04, 2011 @ 20:21:55

    @Statch: Yes, I think competition is the only thing that prods Amazon forward.

    @Janine: I guess I don’t think that Amazon exactly lost market share to BN because the market keeps expanding exponentially and as the market grew in size, Amazon’s percentage share has reduced although it’s over all size has grown. If that makes sense.

    @Devon Matthews: I don’t think Amazon has any interest in reducing prices to 99c. After all, it’s set the floor of it’s most favorable royalty share at $2.99. The higher the price, the better it is for Amazon profit wise. Amazon is only going to use ebooks as a loss leader so long as it is profitable for them.

    Right now, I am guessing that they are going to focus on the music/video aspects of its empire. One of the reasons I think the Am Tab is going to be successful is because the price point will be the same as the Nook but the rumor is that you will get a free Prime Membership. With the free Prime Membership, you also get video streaming of Amazon Instant Video for free and many, many albums are being sold for $5.00.

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  19. Joy
    Sep 05, 2011 @ 00:20:39

    I’m another nook user who buys the majority of her books at B&N. Why? If all other things–including price and having the book up on the date I want it– are equal (and they’re not always), buying from B&N has 2 potential advantages: wireless delivery, the ability to lend and borrow certain (non-agency) books (this can also be done for Kindle books but I read on my nook which means going to the trouble of stripping DRM for anything I want to read that I buy from Amazon. This is worth it for a book I can get free/cheap from Amazon but can’t get free/cheap from B&N, which does sometimes happen).

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  20. Sandra
    Sep 05, 2011 @ 01:03:06

    @Devon Matthews: I have to agree with Dawn and Shiloh. I find the Amazon site much too cluttered. Plus, I don’t like the way they keep trying to push things at me. I look at something (not necessarily a book) one time. Then every time I go back to their site, it’s “You looked at this widget, so we think you’ll be interested in that gadget.” Um, no.

    @Barbara: BN’s ebook selection sucks. I bought my Nook initially because I was tired of reading locked ADEs on my computer (I know, silly reason, but I have a lot of them), but I barely even shop at BN.com because they have almost nothing to offer in terms of ebooks.

    Now, I’ve never had that problem with B&N. Everything I’ve looked for, I’ve found… assuming it’s available as an ebook. Sometimes there’s even an embarrassment of riches. You have to do some filtering to weed out all the Google Books with similar author names.

    @Dawn: I dropped my membership this year, as well, after having it for years (it more than paid for itself during grad school). The new program seems designed to push users back into the store, since the only discounts are in-store, on paper. And I already have a nook. A discount to buy one does me no good at all. And the discount is less than the cost of the membership.

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  21. Brian
    Sep 05, 2011 @ 02:50:49

    @Kaetrin:

    I thought Agency books couldn’t be discounted.

    The books are Agency priced when I check them from the US. I don’t know if Simon & Schuster/Pocket is Agency in Australia or not, but looking at S&S’s AU site her books have a lower list price than they do in the US.

    @Kim:

    What would have happened if Borders had come out with an ereader earlier? Would it still be in business or was it so seriously mismanaged that nothing could save it?

    Even once Borders had “their” eReader, assuming you mean the Kobo, it was treated as just one more device they carried along with competing devices. They never focused on it or anything.

    Borders problems go much deeper than how they handled eBooks. They didn’t even sell pbooks on their own website until fairly recently, they sold them through Amazon of all places.

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  22. Diane V
    Sep 05, 2011 @ 11:28:45

    I finally caved and bought a Kindle when Borders declared bankruptcy because I HATE Barnes & Noble — not that my 2 local stores order the books I want anyway.

    As far as the agency pricing goes, now that I have a Kindle and don’t get discounts like I did at Borders, I am buying a lot less books because they’re not worth $7.99 to $14.99 to me.

    Instead, I have converted over 400 pdf books (bought between 2005 and 2011 at Ellora’s Cave or Samhain) via Calibre and downloaded them to my Kindle to enjoy again.

    So the books that I wanted to read, but refuse to pay full price for like Caridad Piniero’s “The Lost” or Karin Harlow’s “Enemy Mine” — the publishers won’t get my money until I get a discount.

    Agency pricing may have saved B&N, but it has made someone like me, who averaged spending between $200 to $350 per month on new books, cut my spending way back — I think I only spent $35 on new books in August.

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  23. infinitieh
    Sep 05, 2011 @ 14:28:09

    Given agency pricing, it’s cheaper for me to buy the mass market paperback instead of the ebook (even though I have a Kindle and I read ebooks on my laptop). There are coupons and discounts related to paper books and I can sell the books back to the bookstore for credit toward new books or trade with friends.

    Even though I go to Barnes & Noble now, they’re nothing compared to yje old Borders with their truly awesome Romance section. I doubt I would have been such a Romance fan if it weren’t for that.

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  24. LizJ
    Sep 07, 2011 @ 17:18:37

    One interesting thing I’ve noticed – the staffed Nook sales counter appears to be really paying off for B&N, and a lot of the people I’ve seen there have been seniors, who like the bricks-and-mortar customer service being available to them (in this sense, B&N kind of took a page out of Apple’s playbook, but applying it to their own customer base).

    I have an iPad and I primarily buy from B&N. Sometimes from Amazon. Even though I’ve been buying various products from Amazon for years, I like B&N’s site better for ebooks.

    I do have a B&N member card, but obviously not for ebooks (sigh). OTOH, I have two college age daughters. That discount applies to textbooks (every little bit helps).

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  25. Thursday Midday Links: Simon & Schuster Staff Stars in YouTube Video for a Guidette Makeover - Dear Author
    Oct 27, 2011 @ 10:00:48

    [...] Which just goes to further support my belief that Agency has helped BN compete. [...]

  26. Price Fixing Lawsuits Against Publishers Summarized with Timeline of Events
    Jul 08, 2012 @ 14:34:30

    [...] How Agency Pricing helped BN gain a foothold in ebooks. It’s capital investment to remake itself into a technological company is costly.  Despite record sales at the end of the fiscal year 2010 (ending April 2011), it also suffered net loss of $74 million due to nook R&D.  The 4 year trend doesn’t look good in terms of net results.  However, the sales at BN.com have gone from  $466 million in 2008 to $858 million in 2010.  Now BN.com sales are nearly a 1/3 of its overall revenue, matching that of the revenue pulled in by its retail stores. [...]

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