February 28, 2013
Today, Barnes & Noble revealed the details behind the company's prior warnings that things in the holiday quarter didn't go well. Specific weak spots are appearing everywhere for the company, in its retail business, in its college store business, and in its Nook device business. Even the growth in sales of media for Nook devices, at nearly 7% over the same quarter in the prior year, was not growth enough to inspire confidence. Especially given that future sales of electronic content depends on robust sales of the hardware itself.
The company's dilemma will one day be a classic case study of the effect of unrelenting digital disruption, both how a traditional company can innovate under digital pressure as well as how hard it is to steer such a traditional ship in a digital direction. At this point, no single recommendation, no matter how digitally disruptive, will fix the company's problems. But once the company gets through the widely discussed option of splitting the company into two units — the retail arm (with website) that company chairman Riggio wants to buy and the Nook unit (with college business) that Microsoft and academic publisher Pearson are already invested in — there will be a chance on both sides to practice a fundamental tenet of digital disruption: openness.
On the bookstore side, the big digital obstacle is the decline of the printed book, an inevitability that has to be faced no matter how warmly one feels toward the printed word. We've learned from CDs and DVDs that once a physical medium begins to slide, it slides rapidly. Even if readers initially lose only a tenth of their interest in buying physical books, they will end up coming to the store 20% less often, which will lead the bookseller to shrink inventory accordingly, causing even less commitment to physical books, and so on. Play that out several iterations and you end up with a business half the size of the prior business in short order. As happened to Borders, such a rapid decline usually leads to surrender. In that world, the retail unit would have to encourage foot traffic to the store with some other physical product that isn't so easily substituted digitally. I wouldn't be surprised if Barnes & Noble sells frozen yogurt in the future — whatever it takes to grab customers and keep them coming back often.
The digital obstacle on the Nook side is even bigger. Thanks to the rapid consumer acceptance of digital tools and platforms, tablets have moved far beyond the media and entertainment niche that Nook had sought with its own devices. Consumers are so ready to move beyond those limits that tablets are now cannibalizing laptops. To survive, the Nook business will have to embrace productivity more directly, but making such a pivot would require more investment, not less, a spend that shareholders would understandably question.
How to expand your capabilities without expanding your investment? Digital disruption teaches us to embrace radical openness. When digital disruptors enter a market, they have to succeed quickly and cheaply, so they partner promiscuously with whatever company has the skills or resources or customers they need. Even long-established and relatively closed companies know this, which explains why Apple permits Amazon customers to read Kindle books on the iPad. There are at least a few opportunities for Barnes & Noble to go down this open road. Consider the Nook's original strategy to defend its digital territory by walling off its version of Android so it could prevent obvious competitors like Amazon, Sony, and Google Books from selling content to Nook owners. This kind of tactic made sense 10 years ago, maybe even five. But not today, especially when you're eager to convince people that your devices are going to meet their needs for years into the future. A Nook device that carries all of the Google apps available to Android users gives people options for productivity and utility that Nook's development team can't even begin to match. Plus, it creates innovation at no cost because you don't have to hire so many developers to build things that other self-interested app developers have already built.
Yes, this openness threatens the business, but not more than the business is already under threat. And it sets the right example for the bookselling side of the business as well — right now, Barnes & Noble refuses to sell most books published by Amazon. Again, a classic turf decision that made sense in a prior economic era. But under the rules of digital disruption, deliberately refusing to sell people books they want doesn't make sense, especially when a lost sale can initiate a cascade of failed customer interactions that ultimately drain the business of its lifeblood, the pulsing flow of customers through its physical and digital doors.
Taking the rough, open road requires courage, certainly, but no more courage than every other digital disruptor demonstrates every day.
James McQuivey, Ph.D., is a vice president and principal analyst at Forrester Research and the author of Digital Disruption: Unleashing the Next Wave of Innovation. Learn more about Digital Disruption at forrester.com/disruption.