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The Bookstore’s Last Stand

In March 2009, an eternity ago in Silicon Valley, a small team of engineers here was in a big hurry to rethink the future of books. Not the paper-and-ink books that have been around since the days of Gutenberg, the ones that the doomsayers proclaim — with glee or dread — will go the way of vinyl records.

Barnes and Nobles
AP
Barnes and Nobles

No, the engineers were instead fixated on the forces that are upending the way books are published, sold, bought and read: e-books and e-readers. Working in secret, behind an unmarked door in a former bread bakery, they rushed to build a device that might capture the imagination of readers and maybe even save the book industry.

They had six months to do it.

Running this sprint was, of all companies, Barnes & Noble, the giant that helped put so many independent booksellers out of business and that now finds itself locked in the fight of its life. What its engineers dreamed up was the Nook, a relative e-reader latecomer that has nonetheless become the great e-hope of Barnes & Noble and, in fact, of many in the book business.

Several iterations later, the Nook and, by extension, Barnes & Noble, at times seem the only things standing between traditional book publishers and oblivion.

Inside the great publishing houses — grand names like Macmillan, Penguin and Random House — there is a sense of unease about the long-term fate of Barnes & Noble, the last major bookstore chain standing. First, the megastores squeezed out the small players. (Think of Tom Hanks’s Fox & Sons Books to Meg Ryan’s Shop Around the Corner in the 1998 comedy, “You’ve Got Mail”.) Then the chains themselves were gobbled up or driven under, as consumers turned to the Web. B. Dalton Bookseller and Crown Books are long gone. Borders collapsed last year.

No one expects Barnes & Noble to disappear overnight. The worry is that it might slowly wither as more readers embrace e-books. What if all those store shelves vanished, and Barnes & Noble became little more than a cafe and a digital connection point? Such fears came to the fore in early January, when the company projected that it would lose even more money this year than Wall Street had expected. Its share price promptly tumbled 17 percent that day.

Lurking behind all of this is Amazon.com, the dominant force in books online and the company that sets teeth on edge in publishing. From their perches in Midtown Manhattan, many publishing executives, editors and publicists view Amazon as the enemy — an adversary that, if unchecked, could threaten their industry and their livelihoods.

Like many struggling businesses, book publishers are cutting costs and trimming work forces. Yes, electronic books are booming, sometimes profitably, but not many publishers want e-books to dominate print books. Amazon’s chief executive, Jeffrey P. Bezos, wants to cut out the middleman — that is, traditional publishers — by publishing e-books directly.

Which is why Barnes & Noble, once viewed as the brutal capitalist of the book trade, now seems so crucial to that industry’s future. Sure, you can buy bestsellers at Walmart and potboilers at the supermarket. But in many locales, Barnes & Noble is the only retailer offering a wide selection of books. If something were to happen to Barnes & Noble, if it were merely to scale back its ambitions, Amazon could become even more powerful and — well, the very thought makes publishers queasy.

“It would be like ‘The Road,’ ” one publishing executive in New York said, half-jokingly, referring to the Cormac McCarthy novel. “The post-apocalyptic world of publishing, with publishers pushing shopping carts down Broadway.”

Shouldering the responsibilities of Barnes & Noble is one thing. Holding the fate of American book publishing in your hands is quite another. But William J. Lynch Jr., the C.E.O. of the company, says he is up for the battle. With all of three years of experience in bookselling, Mr. Lynch must pull off a balancing act that would be tricky even in good times. He must carve out a digital future for Barnes & Noble without forsaking its hard-copy past, all while his company’s profit and share price are under pressure, his customers are fleeing to the Web and Amazon is circling.

It might come as a surprise, but Mr. Lynch says Barnes & Noble is, in fact, a technology company. Never mind that it has 703 bookstores and operates in all 50 states. To the delight of publishers, he has pushed hard into e-books and, with the help of the well-reviewed Nook, even grabbed a lot of market share from Amazon. But he is playing David to Mr. Bezos’s Goliath. Barnes & Noble’s stock closed on Friday at $11.95, putting the value of the company at $719 million. Amazon’s shares closed at $195.37, valuing Mr. Bezos’s company at $88 billion.

“We could sit here and bang our head against the wall and get sick about it like we do every week,” Mr. Lynch, 41, said of his company’s stock price. But he contends that pushing into e-books with the Nook is the right way, and perhaps the only way, forward.

“Had we not launched devices and spent the money we invested in the Nook, investors and analysts would have said, ‘Barnes & Noble is crazy, and they’re going to go away,’ ” Mr. Lynch said.

Before Mr. Lynch joined Barnes & Noble in 2009, he had never sold a book in his life. (The last book he read — on the Nook, he said last week — was “The Spy Who Came In From the Cold,” by John le Carré.) Mr. Lynch came to the job from IAC/InterActiveCorp, where he worked for HSN.com, the online outlet of the Home Shopping Network, and Gifts.com.

And yet, in three years, he has won a remarkable number of fans in the upper echelons of the book world. Most publishers in New York can’t say enough good things about him: smart, creative, tech-savvy — the list goes on. It helps that he has forged the friendliest relations between publishers and Barnes & Noble in recent memory. They are, after all, in this together.

Nook Tablet
Source: Barnes & Noble
Nook Tablet

Mr. Lynch grew up in Dallas and still speaks with a hint of Texas twang. But he has the foot-tapping intensity of a tech type running on four Mountain Dews. It seems fitting, then, that he usually works out of an office in the Chelsea neighborhood of Manhattan, where Barnes & Noble’s Web and digital operations are based, rather than at the company’s stately headquarters on Fifth Avenue, not far away. When he talks, you get the sense that he could be selling just about anything. As it happens, he is selling books.

Mr. Lynch says Barnes & Noble stores will endure. The idea that devices like the Nook, Kindle and AppleiPad will make bookstores obsolete is nonsense, he says.

“Our stores are not going anywhere,” he said in an interview this month in his office. He pointed to a surprisingly robust holiday season. In the nine weeks leading up to Christmas, sales were up 4 percent from the previous year. Titles for children and young adults are doing well, partly a result of the popularity of fiction with paranormal or dystopian themes, like “The Hunger Games.” And in the second half of 2011, Barnes & Noble picked up a big chunk of business from its vanquished rival, Borders.

Yet no sooner had the holidays passed than Barnes & Noble came out with some downbeat news for the year ahead. On Jan. 5, it projected it would lose as much as $1.40 a share in fiscal 2012. On top of that, Mr. Lynch said shareholders seemed to be underestimating the Nook’s potential so much that perhaps the company would be better off if it just spun off its digital business. Wall Street howled, and Barnes & Noble’s stock still hasn’t fully recovered. A bit of good news for the company is that, thanks to the Nook, it’s been grabbing e-book business from Amazon. Mr. Lynch said Barnes & Noble now held about 27 percent of the market, a number that publishers confirm gleefully. Amazon has at least 60 percent.

Responding to questions about the battle over e-books, Amazon issued a statement on Friday pointing to its own recent growth. In the nine-week holiday period ended Dec. 31, it said, “Kindle unit sales, including both the Kindle Fire and e-reader devices, increased 177 percent over the same period last year.”

Granted, Mr. Lynch inherited a company at a pivotal moment in its long, winding history. Barnes & Noble dates back to 1873, when Charles Barnes went into the used-book business in Wheaton, Ill. His company later moved to New York, bought an interest in an established textbook wholesaler, Noble & Noble, and opened a large bookshop on Fifth Avenue.

So it went until an enterprising young bookseller, Leonard Riggio, came along. After gaining a foothold in college bookstores, he bought that Barnes & Noble bookshop in 1971. Before long, he was offering deep discounts — and expanding wildly across the nation.

Early in his tenure, Mr. Lynch pressed Mr. Riggio’s brother, Stephen, his predecessor as C.E.O., to explain the business he’d gotten himself into.

“I had this ‘La Femme Nikita’ immersion with him,” Mr. Lynch recalled. “We went to lunch and I just told him, ‘Tell me everything you know about the book business.’ ”

amazon.com
Kevin P. Casey | Bloomberg | Getty Images
amazon.com

But at that time, Amazon had already made the first successful move in e-readers: the first-generation Kindle hit the market in November 2007. Mr. Lynch had arrived in the C-suite, but was perilously late to the party.

On Homer Avenue in downtown Palo Alto is a tiny, two-story building that once housed the maker of Palo Alto Bread. It was here, in March 2009, that Barnes & Noble brought a few new hires to create the Nook. Outsiders weren’t quite sure what the company was up to. The landlord figured that Mr. Lynch wanted to open a store.

What began as an almost quixotic effort to catch up with the Amazon Kindle has now grown into a 300-person operation in the heart of Silicon Valley. Mr. Lynch has hired engineers, software developers and designers, who are today spread among five low-slung buildings.

In one room, a virtual wallpaper of Nook color devices hangs in rows neat as a checkerboard. A common area holds a foosball table and a cooler of VitaminWater. Some of the walls are made of silver-colored mesh. Some of the cubicles are lime green.

But there are also reminders of the old Barnes & Noble. Over here is a basket of actual books, including “Travels With Charley” and “The Little Prince.” Over there on a wall are enormous vintage covers of books like “Of Mice and Men” and “The Great Gatsby.”

It was Nick Carraway who told Jay Gatsby, “You can’t repeat the past.” That warning seems to hang over these offices. A sign above one group of engineers says: “We are changing the future of bookselling.”

For all the bells and whistles and high-minded talk, Barnes & Noble doesn’t exactly have the cool factor (or money) of, say, a Google or a Facebook.

Ravi Gopalakrishnan, the first engineer whom Mr. Lynch hired and now the chief technology officer for digital products, said his techie friends were incredulous when he joined Barnes & Noble.

“They were all wondering what I was up to,” Mr. Gopalakrishnan, 46, said. “I’m a technology guy — why I was working for a retail company? They thought I was nuts. There were a lot of e-mails that said, ‘Barnes & Noble?!’ ”

Bill Saperstein, a mild-mannered surfer and a veteran of Apple, said he was persuaded to leave retirement to join Barnes & Noble as vice president for digital products hardware engineering.

“We don’t see a lot of the stock and the free sushi bar and everything else that you find at Google, but there’s a lot of responsibility,” said Mr. Saperstein, 62, who spent seven years working for Steve Jobs. “It was stuff that I strongly believed in, which was reading.”

Barnes & Noble is trying to strike at Amazon with another device. At its labs in Silicon Valley last week, engineers were putting final touches on their fifth e-reading device, a product that executives said would be released sometime this spring. (A Barnes & Noble spokeswoman declined to elaborate.)

Back in New York, Mr. Lynch has been working to revamp the look of Barnes & Noble stores. Last year, the company expanded sections for toys and games and added shiny new display space for its Nook devices. In another sign of the digital revolution, Mr. Lynch expects to eliminate the dedicated sections for music and DVD’s within two years — while still selling some of them elsewhere in the stores. He also plans to experiment with slightly smaller stores. And, before long, executives will take the Nook overseas — a big switch, given that Barnes & Noble has focused almost exclusively on the American market for decades. The first stop is expected to be Waterstones bookstores in Britain.

All of this would be a tall order for any C.E.O., and some analysts wonder if Mr. Lynch has bitten off more than he can chew. Then again, given this industry’s pace of change, Barnes & Noble may have to adapt to new realities, or die trying.

“I think they realize they can’t continue at the rate they’re going,” said Jack W. Perry, a publishing consultant. “They need more money to invest, to slug it out.”

These are trying times for almost everyone in the book business. Since 2002, the United States has lost roughly 500 independent bookstores — nearly one out of five. About 650 bookstores vanished when Borders went out of business last year.

No wonder that some New York publishers have gone so far as to sketch out what the industry might look like without Barnes & Noble. It’s not a happy thought for them: Certainly, there would be fewer places to sell books. Independents account for less than 10 percent of business, and Target, Walmart and the like carry far smaller selections than traditional bookstores.

Without Barnes & Noble, the publishers’ marketing proposition crumbles. The idea that publishers can spot, mold and publicize new talent, then get someone to buy books at prices that actually makes economic sense, suddenly seems a reach. Marketing books via Twitter, and relying on reviews, advertising and perhaps an appearance on the “Today” show doesn’t sound like a winning plan.

What publishers count on from bookstores is the browsing effect. Surveys indicate that only a third of the people who step into a bookstore and walk out with a book actually arrived with the specific desire to buy one.

“That display space they have in the store is really one of the most valuable places that exists in this country for communicating to the consumer that a book is a big deal,” said Madeline McIntosh, president of sales, operations and digital for Random House.

What’s more, sales of older books — the so-called backlist, which has traditionally accounted for anywhere from 30 to 50 percent of the average big publisher’s sales — would suffer terribly.

“For all publishers, it’s really important that brick-and-mortar retailers survive,” said David Shanks, the chief executive of the Penguin Group USA. “Not only are they key to keeping our physical book business thriving, there is also the carry-on effect of the display of a book that contributes to selling e-books and audio books. The more visibility a book has, the more inclined a reader is to make a purchase.”

Carolyn Reidy, president and chief executive of Simon & Schuster, says the biggest challenge is to give people a reason to step into Barnes & Noble stores in the first place. “They have figured out how to use the store to sell e-books," she said of the company. "Now, hopefully, we can figure out how to make that go full circle and see how the e-books can sell the print books.”

Mr. Bezos, for one, isn’t waiting. Amazon has set the book industry on edge by starting a publishing unit that has snagged authors like Timothy Ferriss and James Franco. And, each day, the stock market provides a sobering reminder that Mr. Bezos, not Mr. Lynch, has the deeper pockets.

While publishers’ fates are closely tied to Barnes & Noble, said John Sargent, the C.E.O. of Macmillan, it’s not all about them.

“Anybody who is an author, a publisher, or makes their living from distributing intellectual property in book form is badly hurt,” he said, “if Barnes & Noble does not prosper.”

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