A few years ago, people scoffed at the notion that the fast-growing iPod would revolutionize the music business in a way that would push most album sales online. But nowadays you would be hard pressed to find anyone under the age of 25 in the music section of Best Buy (BBY) or Target (TGT). The days of the corner record store are long gone and places to buy compact discs are few and far between. The book industry is now under similar fire.
Amazon.com (AMZN) was the first to develop an e-reader, the well-known Kindle. This company has relied on its strong ties to book publishers and the quick market penetration of this offering to shoot to the top of the mountain in this new format. E-books are now all the rage, and although there are still large numbers of consumers who enjoy having the actual hardcover paperback in their hands, the seismic shift towards e-readers has begun, and the brick and mortar book chains that do not jump on this wave will certainly be left in the dust, or, at the very least, missing out on an important new sales channel.
In that regard, Barnes & Noble (BKS) responded by constructing its own unit, the Nook. Clearly, its vast array of titles and strong name within the industry lend a level of support that the company can be a major player in this space, but competition seems to heat up on a daily basis. After seeing this strategy be successful for its primary nemesis, and watching its stock price plummet as it remained on the sidelines, Borders Group (BGP) recently rolled out its own version of an e-reader, the Kobo.
But, perhaps the biggest threat to all of these entities came when Apple (AAPL) recently blew away consumers with the unveiling of the iPad. The company sold more than one million of these devices in a hurry, and the implications on the e-book front are hard to ignore. Apple is at the forefront of technological advancements in both hardware and on the Web. Moreover, it has proven its acumen at grabbing market share at a blistering pace. One needs look no further than the iPod in order to see how quickly its devices can undermine an entire industry. Booksellers are now on notice, and they had better abandon their old school ways of thinking, or the likelihood that they could fall victim to this technological titan will increase exponentially.
With this in mind, let us take a closer look at some of the details of Border’s new Kobo offering. General market speculation says that Borders Group was the last to acknowledge that growth in the publishing space lies online. Therefore, being late to the party has put this company at a decided disadvantage. (Eastman Kodak (EK) had a similar attitude toward the digital revolution that swept the photography industry a decade ago and look what has become of that former powerhouse.) One way it is hoping to make up for lost time is by having the lowest price of all e-readers for its tablet. The Kobo will sell at $149.99, undercutting the Barnes & Noble Nook and the Amazon Kindle, which both had been retailing for roughly $260 before a recent price war broke out. Currently, these devices sell for under $200. The iPad goes for $500-- its ability to play videos and graphics heavy games, as well as a plethora of other functions, adds to the cost relative to a dedicated e-reader, but also highlight the failings of those limited products. The Kobo will come preloaded with 100 classic books giving readers the options to start reading immediately. The e-book store that Borders created and stuffed with over one million titles will be available on the Kobo. Clearly, the company’s strategy is to offer the cheapest e-reader and hope to drive recurring customers into their online store. However, this book store is also accessible on the iPad, so while we think Borders Group’s e-book store may be a huge hit, the success of the Kobo in our view is suspect at best. That said, having this implicit relationship with the iPad may well be an advantage to the Kobo, as the penetration of this e-reader is not as important as the increased traffic that the success of e-books in general brings in to Border’s online shop. In laymen’s terms, months from now, if the iPad is everyone’s device of choice, but people are buying the e-books at Borders’ site, the company will probably have no qualms about it.
So for arguments sake, let us assume who the younger generate snatches up the iPad in droves. This will leave a hefty segment of customers that enjoy the bookstore experience to be sold on e-books. If such a scenario develops, it will once again be Borders and industry leader Barnes & Noble going toe-to-toe for market share. All indications after initial reviews are that Barnes & Noble’s Nook is far superior to the Kobo. The Nook can hold a larger number of books, offers Wi-Fi and 3G capabilities and is offered by a company that is better-known, better-respected, and that has already trumped Borders Group in earlier battles. In other words, it is highly likely that this ambitious effort from Borders Group may very well be too little and too late.
And, it’s possible that this analysis is too kind to Barnes & Noble. When all is said and done, the e-reader war will likely boil down to the iPad and Amazon’s Kindle. The Kindle had already penetrated a large portion of the book world before Barnes & Noble and Borders Group even viewed it as a threat. Plus, the Kindle is backed by Amazon.com, which is the darling of publishers for its ability to move books in hefty quantities. Amazon has deals in place with publishers and these pacts will aid in that company’s efforts to hold off the fast-charging iPad, but eventually Apple will use its clout and ink similar pacts. When this comes to fruition, we see no reason why its device would not storm to the top of the e-reader list. Moreover, by this time, the price of the iPad will likely be a little cheaper. This augurs well for future iPad sales and bodes ill for traditional booksellers, in our opinion.
That said, e-readers are not likely to remain the hot product for many more years. The public will clamor for upgrades and additional features that will make current devices look archaic, and the product of choice will likely morph into something much more along the lines of the current iPad. When this occurs, we think the traditional booksellers would do well to get in bed with a company that has the technological wherewithal to advance these devices and still get books into customers’ hands, i.e., Apple. Barnes & Noble, or Borders Group could push its content on the Apple platform, thus reaping substantial revenues from this avenue. Such a marriage would also help in their battle against Amazon, as the Kindle would be the odd man out. It is worth noting that Amazon, perhaps as an answer to such possibilities, has already created a Kindle app for the iPad.
By no means will these current developments be a death knell for companies that make their money from book sales. The older segment of the population can often be stubborn, and shun devices like this in earnest. Book readers are loyal, and the recurring revenue they bring in is negligible, at best. Many people enjoy having hard copies of books and their interest in an e-reader is nil. We think these companies number one priority should be to generate brand loyalty via rewards programs and discounting. Simply get consumers on board in any manner seen fit. In the end, as long as the money is going in to their coffers from book sales, the format on which the consumer is reading will not matter. But, if entities such as Borders Group and Barnes & Noble do not make drastic changes to their business model, or get tangled up with tech behemoths like Apple, the loss of viability will be a very real possibility.