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Goldman Sachs punishes B&N for the Nook
October 24, 2009 | 8:48 am
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By David Rothman
Isn’t Wall Street wonderful? Long term, the Nook just might be great for Barnes & Noble shareholders, given the rapid growth of e-books. But Goldman Sachs—yes, the some overpaid people whom D.C. pampered with a bailouts—has downgraded the stock. Nothing like encouraging investment and innovation, no? CreditSuisse is also downgrading B&N shares.
Oh, well. Greed is good, especially the short-term kind.
I agree with Goldman and CreditSuisse on the need to level with shareholders. But the focus on the short term is unfortunate. Haven’t people been calling for brick-and-click synergies? That’s what B&N will be up to, with its in-store WiFi browsing strategy and the ability of shoppers to try out Nooks before buying.
While margins are thinner than with p-books, B&N just might do fine through volume. Furthermore, it isn’t as if e-books are about to replace all p-books immediately.
Significantly, B&N has a chance to create e-book/p-book synergies that could leverage its major brick-and-mortar presence to stay competitive with Amazon. I myself would love to see B&N distinguish itself not just through the friend-to-friend loan policy, ideally liberalized, but also through e-book/p-book bundling. Text to speech, for exercising and commutes, would also help.
Meanwhile Amazon stock is soaring partly because of of prior investments in the Kindle.
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Comments:
Great opportunity to buy some B&N stock (BKS) — if you think that the Nook is a Kindle Killer.
I’m not sure about this. Nook has some great features, but it also has some flaws. For me, TTS capability is indispensable. I want the the reading aloud feature, even if reading aloud applies only to my own documents that I load to the Nook, and not to the ebooks purchased.
And of course, as many savvy TeleReader authors and commentors have already noted: this ebook business is about more than just the hardware, it’s an entire purchasing ecosystem. B&N will need to keep their ebook prices low — equal or below Amazon’s ebook prices — if they want to knock King Kindle off the top of the golden mountain.
Michael Pastore
50 Benefits of Ebooks
Reading the report on the GS downgrade, I find it hard to fault them. Their issue isn’t that B&N is spending money to build up an ebook business–they applaud it, in fact, but rather that that is *all* they’re doing.
What they are saying, in essence, is that as B&N moves into ebooks, some of those online ebook sales will come at the expense of their B&M pbook sales which, means the net revenue per store is likely to trend downwards so the profit margin of those stores will trend downwards and the value of *having* those storefronts will diminish (however slightly) over time.
Since a significant portion of the value of the company is tied to the value (and operating costs) of those storefronts, anything that makes them less valueable moving forward is going to make the company as a whole less appealing to investors.
The stock was previously rated as a “hold”, a wait-n-see play. Now they’ve moved it into “sell”, as in “it’s not going to be worth more than it does now”.
Strictly their opinion.
But when you factor in that a lot of what B&N sells in those stores (books, music, videos) is starting to migrate to online digital, the Nook looks to be a “too-little/too-late” investment; more of a minimizing damages move.
By contrast, Amazon’s Kindle investment has always been a net growth generator for the company because any sales migration from pbook to ebook simply frees up warehouse space that can accommodate other retail products; clothes, electronics, even food. (And Amazon is already a player in online music and video, both on disk and in digital downloads/streaming. They are covered there.)
Unless B&N finds new products for the stores to sell (electronics? furniture?) or a way to sell more of the same products, those stores are just as likely to be a millstone around their corporate neck as they as an asset.
For a comparable case study, how about contrasting that other digital content high-flyer, Netflix with *their* B&M counterpart, Blockbuster?
Plenty of parallels, actually; a lot of what B&N has been doing of late (buying Borders, ramping up online sales, buying Fictionwise and getting serious about ebooks) all mirror Blockbuster’s moves to try to keep up with Netflix (buying Hollywood Video, starting mail-based rentals, buying an online video rental operation). B&N management seems more competent and a bit quicker in responding than Blockbuster’s but they’re still stuck in the “reactionary” side of the equation. They’re still playing catch-up in offerings and market share.
It’s going to take a *lot* of creativity to turn all those buildings into long-term assets. And its pretty much a guarantee that some of those storefronts are going to have to go. And closing stores means “charges against earnings”.
Still want to buy cheap B&N stock?
Do we really need to list all the previous examples of once-dominant B&M retailers that found their assets and core expertise rendered meaningless by online sales?
This has happened before; it will happen again…
Anybody looking for a near-term anti-Amazon would be well advised to look elsewhere; Google or Apple, maybe. I doubt B&N will be much of a challenger for a while…
Great reply, Felix, but I still think that B&N is better off with the Nook than without it.
I would agree with you on Google being a better long-term investment (although the shares could be a bit expensive right now–same for Apple). As I’ve often reminded people by way of disclosure, I’m a very very small long-term holder of GOOG for retirement purposes. I held even after a steep tumble. It’ll be interesting to see if B&N shareholders are rewarded for holding.
Thanks,
David
Oh, no question B&N with Nook is better off than B&N without it.
But they’d be best off if they didn’t have so many storefronts and weren’t facing a three way war with Walmart and Amazon.
What’s interesting is that Amazon, with no storefronts, is fighting Walmart with no ebook store and B&N with both.
Makes you wonder how long before Walmart gets into the ebook arena.
B&N is absolutely better off with the Nook than without it. I see a great deal of hope for the model — people still get the B&M bookstore experience (and their coffee at the internal Starbucks?), but don’t necessarily turn around and give their money to Amazon, as some Kindle owners now do. Now B&N will be able to reap some of those profits directly and immediately.
Of greater interest to me, though, is that *finally* more of the right people (i.e. ‘people who read and spend money on books’) will be able to see and touch an e-ink device in person *while they’re thinking about reading and buying books*.
I first laid eyes on an e-ink reader at Borders, in December 2007. It was a Sony, and the store display was pretty subdued. I thought four things, quickly. 1. “What a beautiful thing.” 2. “I’ve been waiting for something like this for 30 years” 3. “So if I buy one of these, Borders quits making money?” and 4. “What?! No searching, underlining or annotating?! Hm. No sale. At least not yet.”
Worse, though, was/is Amazon’s attempt at viral marketing of the Kindle — getting its customers to show their devices to others considering a purchase. That was/is an extremely inefficient way of ‘showing’ the device. I didn’t see a Kindle 1 for the first time until a couple of months after I’d *bought* my Kindle 2, in 2009. Like Borders in 2007,
Fry’s now has Sony Readers. If I were Sony, I’d pull them. Fry’s isn’t the book-destination of the book-minded. When at Fry’s, the book-minded are looking for a router, or a replacement power supply; and the Fry’s display makes it obvious that their staff would much rather sell you a giant, flat-screen tv.
Now that B&N is invested in both e-reader technology and its content, more people will be able to ‘try before they buy’. It will certainly help B&N at least some; but as a librarian, I’m most interested of all in its impact on the e-reading industry as a whole. What will be next for other device manufacturers? Will the buzz and public visibility of the Nook take e-reading to ‘critical mass’? Will some other device be the thing to do it? Will something happen out of the blue to change the game completely? And what the heck *is* the deal with Google Books?