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