Amazon Should Acquire Barnes & Noble

You’ve got to hand it to Jeff Bezos. Amidst ongoing news coverage of Amazon’s popular Kindle Fire HDX, its online foray into Netflix-esque digital programming, and its familiar role as nexus of the online holiday shopping season, Bezos managed to pull yet another PR ace from his company’s burgeoning sleeve this past weekend with the announcement of Amazon Prime Air. The new service is expected to launch in 2015 and will supposedly deliver small packages via drone shipments within 30 minutes of placing an order.

It’s an amazing, terrifying idea, and one that will probably have to clear miles and miles of regulatory tape before any drone levitates a single inch off the ground of one of Amazon’s storage facilities. So what other aces can Bezos play in the meantime to keep up his company’s ever-increasing public profile?

Here’s one suggestion: acquire Barnes & Noble. My friend Jamie and I began talking about this idea about a month ago, and it’s increasingly clear that such a move would be a highly sensible avenue to buttress Amazon’s identity as a known and trusted brand.

The immediate impetus for this move would be to consolidate Amazon’s power as the largest market force in bookselling. Barnes & Noble is the last major challenger to Amazon’s cost-effective behemoth and absorbing it into the Amazon portfolio would give Amazon a great deal of additional power in controlling book marketplace standards. It would also remove the competition of B&N’s Nook which, although an increasingly marginal player in the e-reader and tablet market, still has a relatively robust digital infrastructure. Acquiring this infrastructure could have important implications down the road. Example: Microsoft owns a 10% stake in Nook and an Amazon purchase of the entire B&N brand would eliminate the potential of Microsoft adding a Nook-based reading application to Windows if and when Nook is spun off.

There would also be direct financial benefits from such a deal. Amazon can easily afford the $985 million market cap of Barnes & Noble as well as a hefty stock purchase premium. And given that B&N still earns $374 million in annual profits from its physical bookstores, it’s a deal that would eventually pay for itself.

More important than market share consolidation, however, is the new public narrative that Amazon can create from such an acquisition, as well as the previously untapped footholds it can gain in local communities. The conventional bookseller lament is that Amazon is destroying the joys of the physical book store with its soulless, algorithmic cost-slashing. In one acquisition Amazon becomes the cultural proprietor of the local bookstore, a global force that still cares about the benefits it can provide to local communities.

People like bookstores for a variety of reasons. They imbue a sense of spontaneity and discovery that online shopping will always have a hard time replicating. They’re a great place to wander through on rainy days while grabbing a coffee or pastry and enjoying extended previews of potential purchases. They’re a prime destination for picking up quick but thoughtful gifts. Most importantly, in many cases, they’re a sort of cultural hub for the community, hosting authors and other guest speakers that are open to the public, almost always free of charge.

Imagine how the noxious narrative surrounding Amazon would change if they purchased the largest bookseller and made a campaign of further promoting these public goods that bookstores provide. Not only would Amazon become a cultural touchstone in many communities, it would be seen as the savior of bookstores and a force that understands the communal value of reading.

How Amazon would operate a brick-and-mortar bookstore chain is open to interpretation, but I see the potential to combine the best of a library rental system with the benefits of immediate purchasing. Amazon would still offer books for sale, perhaps at a slight markup from their online counterparts, but customers would likely pay the premium for the immediacy of purchase. More importantly, Amazon could leverage its Prime program to create further purchasing incentives, in which anyone with online membership would receive perks or in-store benefits. Jamie suggested a bevy of avenues this kind of program could take: free coffee, sales discounts, or even participation in a library-esque book loan system.

Unlike Apple and Microsoft, Amazon does not have a dedicated physical space to demonstrate its wares. Its Kindle line is available in a number of retailers but is often displayed amidst a sea of other tablet options. Purchasing Barnes & Noble would give Amazon space for a devoted Kindle display in the most innocuous of atmospheres- surrounded by physical books! This space would also allow Amazon to publicize and promote any major, non-book online deals, letting customers test out key products that they might be reticent to purchase without trying beforehand. This kind of store setup would also facilitate the purchase of online products in-store. Most people go home from Barnes & Noble to buy a discounted or e-reader edition of what they saw in the store. Why not cut out the middleman and let people make those purchases directly from a store terminal?

A purchase of Barnes & Noble would have limited returns, to a degree. The single-floor B&N stores in malls throughout the country would not be conducive to this kind of plan; the main core of the deal would be access to the multi-tiered B&N megastores that dot select communities in major population zones. And, again, on the whole, this would be revenue-neutral for Amazon at best. Its margins are already slim or nonexistent in the online book business and any revenue gained from the stores would not generate net profit (due to the deal’s upfront expenses) in the immediate future.

But, as Jamie noted in our conversation: “Normally, this might be a pie in the sky scenario for a profit-maximizing corporation in Amazon’s shoes, but Amazon hasn’t ever cared about profits, and shareholders apparently don’t care that Amazon doesn’t turn a profit.”

The purpose of this deal is one of crafting a strategic PR narrative rather than strict accounting. Bookstores are not moratoriums for the dying print medium; they’re living, breathing communities where people go for diversion, enlightenment, and solace. Subsidizing this kind of experience is something Amazon can easily afford, while simultaneously eliminating its largest bookseller rival and creating a dedicated space to promote Amazon products. It’s a win-win-win for Amazon’s reputation, readers, and communities across the board. (Indie booksellers, not so much… but that’s why they should band together and create an online distribution network, as described here.)

Thanks to Jamie for the conversation and ideas that informed this post.

3 thoughts on “Amazon Should Acquire Barnes & Noble

  1. I’m inclined to disagree with you here. I can’t really see any great benefit of Amazon acquiring Barnes & Noble, except for the purpose of gutting it.
    I understand the appeal of physical bookstores and Amazon has been trying to get into that market by offering bookstores a substantial cut on the profits if they’re willing to sell Kindles in their stores(which would be a terrible idea for the bookstores in my opinion; it’s encouraging your own death). However, I think that overall a physical presence is no longer necessary.
    Admittedly, like you said, many people do go to bookstores to check out physical copies of books or tablets but go home in order to purchase them. I think this is not going to keep up significantly for much longer though. I haven’t gone to a physical bookstore to check out a book in a very long time, nor did I actually really see or use a kindle at all before I got mine. Both of these happened for the same reason: I don’t have time to do so. I don’t have time to go to a bookstore to check out if I’m going to like this book, which would require a decent amount of reading time, or use this tablet enough to see if I like it or not. I base these decisions off of word of mouth; more precisely, I base them off of internet reviews. I based which phone I’m going to get off of internet reviews, if I’m getting my kindle or not, the purchase of my macbook, etc… I don’t see physical stores as necessary or worth the additional cost of the goods inside.
    My rambling is leading somewhere: having physical bookstores would just be a drain on Amazon’s resources in a field they are not well versed in. I’m willing to bet Barnes & Noble makes a significant amount of their profit from textbooks, not conventional book sales since they’ve cornered the market for that in many respects(RIT’s bookstore is a B&N). That’s not Amazon’s gambit, though. They make money off of Kindle books/textbooks, though I’m willing to bet that’s not a significant part of their profits. By trying to dump so much money in the physical bookstore market, I feel like they’d just be draining their resources in a market they aren’t specialized at and is bound to end up losing money. Chrysler & GM buying up random small car companies and trying to utilize their brands come to mind, as it failed miserably. I think if Amazon actually wanted to get physical stores at the moment, they’d basically be Wal-Mart competitors since their profit comes from such a large variety of sectors. I also think you’d have to be crazy to go up against Wal-Mart. So in summation, I think having physical stores would only drain upon Amazon’s resources for a risky bet at increasing market share. (Also, as a little aside: I buy from Amazon because I don’t want to go out and deal with people. I think many feel the same way regardless of if they admit it or not)
    Nevertheless, I can see one reason why amazon would buy B&N: $25 free shipping, part 2. Amazon lost money on it’s free shipping for any orders of $25 or more, hence why it’s now $35. They did it as a retail equivalent of dumping: the free shipping made amazon cheaper than any of the competitors and Amazon’s pocketbooks could wait long enough for the others to die out despite losing money the whole time. Kindles & X-Box have the same philosophy, really: the device is sold at a loss but they’ll make up for it with the books/games. If they bought B&N, they could operate it at essentially a loss while muscling out their competitors. Eventually, they’d finally shutter all the B&N stores but after gaining a significant market share. At B&N’s current price, however, I don’t think it’d be a worthwhile decision. If they start to go the way of Borders in the future, then certainly go for it. Otherwise, I think they can out-market them in much more cost-effective ways.

  2. Some very fair and excellent points, Josh. I’ll try to address each of the issues you bring up.

    While physical book sales are currently in decline, I’m hesitant to agree that we’re headed to an exclusively digital reading future. I see publishers eventually producing two types of books: super cheap, low-end books or lavish bound editions. The goal will be to target different market segments: the former is for those who want an alternative reading experience that doesn’t involve looking at a screen, and the latter is for those who view physical books as a product whose form and design justifies a higher purchase price. I agree the physical book market will get smaller, but I don’t think it will disappear in the next decade even though eBooks have a definite price advantage over print.

    You see this kind of strong market interest in print reflected in well-run independent bookstores, like Brookline Booksmith or Strand Books in NYC. They might not be high-margin businesses, but they always have a lot of traffic. They offer huge used book sections and other non-book “gift” items for sale. You’re going to see a lot of small independents closing over the next couple few years, but I’d imagine these kind of stores have the best chance of surviving. They’re cultural touchstones in their respective communities. Amazon could do this kind of thing on a bigger scale.

    I think you’re right about Amazon’s probable ineffectiveness in working the physical book market, especially if they envision the market disappearing entirely. But it’s hard to imagine all physical retail stores going the way of the dodo in the near term. Amazon wouldn’t be selling the Kindle in physical stores if they were shirking all brick buildings in preparation for an all-digital future. That’s part of the reason why they proposed the whole Kindle-in-indie store idea (which I agree is a horrible idea for any small bookseller who wants to stay in business).

    Perhaps I should qualify my argument – I think it makes sense for Amazon to purchase B&N when the price of an acquisition gets low enough to justify an investment that might not have substantive returns. Your analogy to Chrysler and GM is an applicable one. So the goal should be to buy low and eek any value out of the purchase as possible. Worst case scenario is, as you point out, they undercut all remaining print franchises before shuttering.

    The price will probably be low enough in the next couple of years. Nook sales fell over 30% year over year; textbook sales, as you mention, are steady due to higher book rentals, and retail is at least afloat. But textbooks are fast moving to all digital and the print market will shrink as we both discussed above. Eventually B&N will be unable to cut costs further. At that point, I’d say Amazon should go for it. (Amazon’s market cap is $177 billion; they can afford a few hundred million dollars for B&N when it eventually becomes available.)

    Online ratings are definitely how most people judge whether they’ll buy something. There will always be a market for trying something before you make a long-term commitment to it, though. And while free return shipping is a fair alternative, it’s a lot easier to drive to a local store and try out a product. I’m thinking Amazon could keep high-margin products that people would want to test in its acquired stores. There are about 630 B&N stores currently open; I think most of these probably will end up closing and wouldn’t make sense for Amazon for the reasons you state above. Maybe 150 could serve as retail hubs for Amazon’s presence in different communities.

    I think your arguments and my post are compatible. B&N probably won’t be a long-term profitable acquisition as you say, but I think there’s a good decade window where, if the price is good, Amazon could acquire the chain, spin a good public narrative, try something different, and see if it works. It would have to be at a low enough price but it’s worth it.

    Thanks for commenting- made me reconsider some of my arguments, since a lot of what you say reflects current market trends. Perhaps I’m being overly optimistic since I strongly believe physical bookstores, especially those that host community events and guest speakers, are worthwhile cultural hubs. I appreciate the dose of sensible realism!

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