Technology

Barnes & Noble's Nook Nightmare Stars Amazon and the DOJ


Barnes & Noble's Nook Nightmare Stars Amazon and the DOJ

Photograph by David Paul Morris/Bloomberg

Let’s boil down Barnes & Noble’s (BKS) Nook nightmare into a handy juxtaposition concerning the price of the digital version of Donna Tartt’s gripping new novel, The Goldfinch.

Amazon’s (AMZN) Kindle price: $7.50.

Barnes & Noble’s Nook price: $14.99.

There are plenty of reasons for the stunning decline of the once-promising Nook. Barnes & Noble has found itself unable to compete with the likes of Apple (AAPL) and Amazon in the broader arena of multipurposed tablets. The New York-based retailer has also been undermined by the continuing migration of its customers from physical stores to online book-buying and by the desire of its risk-averse institutional shareholders to support deep, profit-draining, long-term investments in new frontiers.

Even that doesn’t completely account for the dramatic upending of its Nook business. Barnes & Noble today reported gruesome numbers—a 60 percent drop in its digital division, to $125 million, from its sales in last year’s holiday period. (Sales in its physical stores fell 6.6 percent from the previous year.)

“Sales in the NOOK segment declined year-over-year largely because during the previous holiday season the company introduced two new tablet products, while no new tablets were introduced this year,” said Michael Huseby, Barnes & Noble’s new chief executive, in a statement. “Instead, we executed our plan to sell through our existing high-quality devices.”

That’s true. It’s also not a very robust defense. E-book prices are a big reason why Barnes & Noble is losing this battle. The lopsided pricing on The Goldfinch is one of many examples. Amazon often sells e-books at a loss, using low prices to lure customers into the Kindle ecosystem. It goes so far as to give many books away—the Kindle Owner’s Lending Library allows Kindle owners with Prime membership to “borrow” a free book each month. And a relatively new service called Kindle MatchBook prices digital copies of books at $2.99 or lower, when a customer has already bought the physical version of the book. Barnes & Noble doesn’t have the resources or the relationship with customers to match MatchBook and services like it.

Some of the blame here lies with the U.S. Department of Justice. Its successful lawsuit against Apple and major book publishers, for conspiring to set fixed, industrywide prices on e-books, now allows Amazon to set its own often ridiculously low prices. “The Justice Department came in at a time when agency pricing was weakening Amazon’s hold and dispersing the e-book market,” says Mike Shatzkin, CEO of the Idea Logical, a book industry consultancy. “By eliminating fixed prices for e-books, they have handed the advantage back to Amazon. Now everyone else is losing share.”

Not everyone shops for e-book readers based on the prices of digital books, of course. But Barnes & Noble hasn’t given customers many other reasons to opt for the Nook over rival devices. Amazon continues to roll out new publishing services that are exclusive to customers of Amazon. Day One, a smart new literary magazine, includes short stories and poems. Kindle Worlds is a program that opens up a catalog of legal fan-fiction based on well-known literary characters.

Individually these are minor services. Taken together they are links in the chain that is strangling the Nook.

In an interview with the Wall Street Journal yesterday, Huseby said he was committed to the Nook. “Your best chance of success for selling digital content is on your own dedicated devices which have your brand or a co-brand on them,” he said. “If we can leverage an outside partnership to help us with devices, we will do that.”

But Barnes & Noble will need more than a hardware partnership to get out of the trap sprung by Amazon—and the DOJ.

Stone_190
Stone is a senior writer for Bloomberg Businessweek in San Francisco. He is the author of The Everything Store: Jeff Bezos and the Age of Amazon (Little, Brown; October 2013). Follow him on Twitter @BradStone.

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