February 20, 2013

The Last Man Standing

by Alan Beatts

Leonard Riggio, the driving force behind Barnes and Noble for the past 40 years, is a very smart businessman.  I think he's smart in a hugely cut-throat sort of way, but smart all the same.  He is certainly seeing the writing on the wall when it comes to sales of physical books.  Barnes and Noble recently announced that they will be closing around a third of their stores in the next decade.  Their stated aim is to drop the number of stores from the current 689 to somewhere around 450-500.

It's possible, I suppose, that it will actually play out that way over the next decade.  But I doubt it.  My suspicion is that, in a little bit, we're going to hear that plan has been "adjusted in the face of changing consumer habits" and is going to go much faster.  A number of sources, including The Atlantic and Knowledge@Wharton have recently run articles detailing some of the problems B&N faces.  Nook sales are down (12.6%), store sales are down (10.9%), and Amazon continues to take business away from them.

Some commentators are even more pessimistic.  Dennis Johnson of Melville House noted that, "A highly placed Big Six exec I respect to no end told me to look for the death of B&N in two to three years. That was two years ago."  He also points out that the demise of B&N would be very bad for the entire publishing industry since it would reduce the total amount of shelf space in the US by something approaching 50%.  Finally, like the folks at The Atlantic, Mr. Johnson cites recent closures of stores in locations that should be very profitable, like 6th Ave. and 8th in Manhattan, and in the heart of Silicon Valley.

So, how does it play out?  I've never claimed to have a crystal ball (or even a Magic 8 Ball) but I know what I would do if I were Len Riggio (and as ruthless as he is).  Many observers have suggested that the most viable part of B&N's current business is their ebook reader, the Nook, and that it might make sense for B&N to spin that part of the business off to make a separate company.  Since B&N has gotten some fair investments in that technology ($300 million from Microsoft and another $89.5 million from British publisher Pearson, the parent company of Penguin Publishing), the willingness of some businesses to put money on the table argues well for the Nook's odds.

I'd go with that.  Spin off the Nook as a separate company.  And, if possible, leave a ton of debt behind with B&N.  Then I'd dump my shares of B&N, vacate the board, and get on with making the Nook work.  Of course, I'd be leaving the shareholders of B&N holding the bag (along with some publishers), but how bad is that for someone who pursued a scorched earth policy against their competitors for almost two decades?

Could Riggio pull that off?  Maybe.  I'm not an expert on corporate governance but, unlike a lot of other companies out there, B&N is completely controlled by the Riggio family.  So, really, they can probably do anything they want.

Perversely, I'm not sure I want B&N to fold.  I think it will be very hard on the publishing business if they do, and that affects me directly.  But more so, I'm concerned about the effect that would have on the literary life in this country.  In many places, a B&N is the only bookstore for miles and miles (in part because they were so successful in putting indie bookstores out of business).  I'd hate to see much of the US become a desert without bookstores at all . . . without the opportunity to browse shelves and talk to people who love books . . . without a chance to find something totally unexpected.

But, on the other hand, I am mostly Scots and we do love a grudge.  I'll be much happier if the last man (or woman) standing in the bookstore brawl is _not_ Leonard Riggio.  And I'll be very pleased and proud if he goes down before I do.

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