Barnes & Noble (NYSE:BKS) is hosting an event next Tuesday to introduce the next generation Nook e-reader, just in time for the Christmas shopping season.
One Motley Fool article has already written off any hope of Barnes & Noble catching up. In a column entitled “Why Is Barnes & Noble Even Trying?” the owner of an iPad and a Kindle predicts utter failure:
B&N backed itself into a corner, and that's a dangerous place to be for a resources-strapped company fighting a hairy proxy battle for its independent survival.
What can it possibly announce come Tuesday? It's hard for B&N to take prices lower, and it's not as if it's a feature or two away from relevancy. Kindle is going to walk away with the dedicated reader space, while Apple and the flurry of tablets will take over the high-end and graphical textbook market.
He’s wrong: B&N may be down, but it’s not out.
In the e-reader space, the devices themselves are commodities. Yes, there are differences, yes some are cheaper or lighter or brighter. But the key differentiators — screen readability and battery life — depend on outside suppliers available to all. Instead, B&N needs to attack Amazon (NASDAQ:AMZN) on one of the other dimensions of competition — the broader value proposition for the slate format.
What’s clear is that the e-readers are a different segment than the iPad, and for now there’s room for simpler, lighter, cheaper devices priced less than the Apple (NASDAQ:AAPL) tablet — at least until people can get a $200, half-pound device that runs applications and surfs the web in color.
Amazon has a lead here over Sony (NYSE:SNE), Barnes & Noble and others. It’s hard to tell how much of a lead, since Amazon won’t be honest about its actual sales and by controlling the distribution of Kindles, there’s no way for a third party like NPD or Gartner to measure this objectively.
Perhaps Amazon is hiding how small the book reader niche is. In January, CEO Jeff Bezos said “millions” of Kindles sold and Business Week speculated that the actual number was between 2-3 million. That’s 3 million Kindles in 27 months, versus 6.5 million iPads in 6 months.
Now that Steve Jobs says he’s not making a 7" iPad soon (if ever), this suggests there is a window of opportunity for the 7" readers. However, to win this market, B&N needs to challenge Amazon head-on.
For my own personal use, I’ve been evaluating the iPad, Nook, Kindle and pre-announced Android tablets (like that from Samsung (OTC:SSNLF)). There are two ways that B&N can grow the low-end segment before Amazon does.
The first is that the e-readers are more than just for buying books. B&N has already offered other features such as browsing books in stores, and free Wi-Fi access at B&N stores. The E Ink display of the Kindle and Nook has its limitations — no color web pages — but B&N can do more to leverage the Android platform and other applications that users want for their mini-tablets.
Secondly, B&N needs to be the honest broker of open content formats. Amazon begrudgingly will support other formats, but if you look at it closely, its strategy is “AZW everywhere.” The company is more keen about promoting its proprietary file format and killing any efforts to establish a rival format, such as ePub. I don’t see Amazon relaxing this approach — any more than Apple wanted to eliminate the lock-in from the FairPlay DRM — unless or until it’s forced too.
Open standards are always a strategy of a follower or new entrant, not the market leader. The playbook is well-known and B&N needs to execute on it. The industry is impatiently awaiting an open format not controlled by any firm — presumably a DRM-infest ePub — but no one approach is yet challenging AZW.
Beyond books, the world has a lot of PDFs out there. I have 6 gigabytes of academic articles on my hard disk, and the average college student (at least in business) has a few dozen PDFs to read every semester: articles, syllabi, etc. The PDF is a semi-open standard, so B&N could get Adobe’s (NASDAQ:ADBE) support if the Nook2 is well-suited for taking PDFs on the road. (And for obvious reasons, Adobe fears a tablet world controlled by Apple.)
There is the razor-and-razor blade cross-subsidy issue. Amazon wants to make money on its content and so pushes the Kindle price down in a way that makes it almost useless unless you pay for content. (This is reminiscent of its Seattle neighbor protecting videogame sales by making it hard to convert the XBox to be a Linux box.) Like Apple, B&N needs to make enough on the Nook to be profitable without proprietary content downloads — but perhaps using features like the in-store browsing to drive repeat traffic by Nook owners to its retail locations.
A final serious problem is identified by Tim Carmody of Wired: execution. Even the best ideas don’t count if they’re not executed well. This is doubly true against an entrenched rival with a 2-year headstart, if the main battle ground is the narrow window of the 2-month Christmas selling season. As Carmody notes, B&N couldn’t ramp up quickly enough last year:
Last October, Barnes & Noble announced the dual-screen, Android-powered Nook, promising preorder delivery and in-store sales before Christmas. The company wasn’t able to ramp up production to meet demand and had to fix immediate firmware bugs, delaying some preorders and pushing back in-store availability to February.
I’m sure B&N knows this too. My understanding is that the Nook was rushed to market in less than a year, creating a new organization from scratch. Now it has a Nook software development group in Palo Alto, in Silicon Valley just down the road from Stanford.
So this year the execution will definitely be better. Will it be enough for Barnes & Noble to gain on Amazon? Only if they outflank their proprietary rival with openness and features that Amazon is (so far) unwilling to offer.
Disclosure: No positions