You don’t start a farm just because you sell milk and eggs, and you don’t suddenly decide to manufacture vehicles simply because you own a dealership. Likewise, you don’t produce mediums for reading just because you own a book store.
Barnes & Noble, Inc. (NYSE: BKS) obviously didn’t draw this comparison when it decided to enter the tablet market in 2009.
Of course, some will be quick to point out the success of the Amazon (NASDAQ: AMZN) Kindle. After all, Amazon went from selling books to producing e-readers, right?
Well, that’s true, but Amazon was – and always will be – a tech company; Barnes & Noble just sold dead trees.
Barnes & Noble was no match for larger and established technology companies such as Amazon, Apple (NASDAQ: AAPL), and Google (NASDAQ: GOOG). The company figured it could control the market through in-store sales, but it was dead wrong. Just take a look at IDC’s analysis of tablet market share:
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| Source: International Data Corporation |
Barnes & Noble is somewhere is that sliver of the dreaded “Others” category. It’s no wonder the company is heeding the competition and handing over color tablet production to an unnamed third party.
And Barnes & Noble has little left to fall back on. Paper medium sales are steadily decreasing and saw another 10 percent drop in the most recent quarter. Barnes & Noble entered the tablet market because of the inevitable decline of paper-based books. The fact that the company is now backtracking strongly indicates it has nowhere left to turn.
Barnes & Noble will continue to sell basic black and white e-readers, but it still needs to compete against Amazon – a battle that will inevitably go to the Goliath. With the Kindle continuously gaining traction (Amazon observed a 157 percent growth in tablet market-share this year), and with Amazon’s nearly endless pockets, Barnes & Noble will eventually be forced to concede.
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The Bitter End
Remember what Netflix (NASDAQ: NFLX) did to Blockbuster? That’s exactly what e-readers and tablets are doing to Barnes & Noble. Frankly, I can’t fathom a single scenario in which Barnes & Noble sustains itself as a publicly traded company.
If that sounds a bit harsh, just take a look at the numbers. Barnes & Noble saw a revenue drop of 34 percent year-over-year in its most recent quarter. The company also doubled its losses in the same timeframe, with $118.6 million gone in three months.
By cutting manufacturing, Barnes & Noble will definitely be able to decrease operational costs, but there is simply no sustainability in a company with ever-decreasing revenue. Ultimately, it’s products and services that drive revenue, and Barnes & Noble no longer offers a valued product.
Barnes & Noble has retreated to the e-reader, a market with an expected decline of 27 percent in 2013. And even with its large inventory of digital books, Barnes & Noble holds little value – there is only so much profit in those 0s and 1s.
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| Source: IHS iSuppli Research |
Barnes and Noble saw a net loss of 16 retail stores in 2012 and expects another net loss of 10 to 15 stores in 2013. Expect this trend to continue, and feel safe shorting the once mighty retailer.
On the upside, the e-reader markets in Europe and Asia are relatively untapped. Check out Rakuten (OTC: RKUNF), which beat Amazon to the Japanese e-reader market with the Kobo Touch. Kobo sales were up 145 percent in the first quarter of 2013, and the device already has 14.5 million users.
And despite Amazon’s success in the United States, it will be difficult for the American company to compete with the Kobo Touch’s Japanese-text-support. Unlike regular commodities, e-readers are largely affected by language and character barriers. Rakuten’s footprint should remain strong in Japan, at least until Amazon successfully tackles that issue.
Turning progress to profits,
Jason Stutman
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