Amazon Just Sealed Barnes & Noble’s Fate

Barnes & Noble (NYSE: BKS  ) is a company in crisis. Large losses suffered at its NOOK division have weighed on the bottom line, and its last two earnings reports were disastrous. But even the retail operation could be in peril. The company's founder and chairman, Leonard Riggio, announced that he would be abandoning his efforts to acquire it.

No doubt, Amazon (NASDAQ: AMZN  ) is responsible for much of Barnes & Noble's woes. From the beginning, the online retailer was built around selling books over the Internet; the introduction of the Kindle and the shift to digital only enhanced Amazon's dominance. But now the company is planning a hybrid of the two. By mixing digital with paper, Amazon could doom Barnes & Noble once and for all.

A big discount
Starting in October, Amazon customers who buy paper books from the retailer will have the option to buy a digital copy at a steep discount -- $1-$3, and in some cases, for free. This program, dubbed Kindle MatchBook, will even include books that have been purchased from Amazon in the past.

Not all books will fall under the program. At present, only 10,000 titles are included. Still, Amazon says it will work to expand the program to other publishers, and it seems likely that many of them will eventually sign on. The ability to squeeze an extra $3 out of most customers could prove enticing.

If Amazon didn't already have a competitive advantage, it definitely does now. Why buy a paper book from Barnes & Noble when Amazon bundles a cheap digital copy? Even if the book in question isn't currently part of the program, its potential to be added in the future could sway many customers.

To be fair, Barnes & Noble could copy the program with something of its own. But given that its NOOK division is already struggling, and there's talk that Barnes & Noble could spin it off or sell it to Microsoft, that seems unlikely.

Amazon's advantage over digital competitors
Amazon and Barnes & Noble aren't the only companies that sell digital books. In fact, Apple (NASDAQ: AAPL  ) might sell as many e-books as Barnes & Noble. Unfortunately, there are no hard market share numbers, but based on the Justice Department's recent e-book price-fixing lawsuit, Apple's share of the e-book market might be 20%.

If Amazon's market share is near 55%, a figure from Bowker Market Research, Barnes & Noble's is -- at most -- 25%, and likely much less, given that there are other players in the space, including Google.

Amazon's ability, then, to bundle paper with digital gives it as much of an advantage over Apple as it does over Barnes & Noble. Sure, many readers may have made the switch wholly to digital (including myself), but there are undoubtedly some readers out there who would like the flexibility of having both the print and digital versions of a book.

Apple isn't likely to start selling paper books anytime soon, so it'll never be able to match Amazon in this area.

Admittedly, iBooks aren't a big part of Apple's business. In fact, iTunes as a whole is largely insignificant when it comes to Apple's earnings. But that isn't to say that they aren't important. Media sales help keep customers locked into Apple's ecosystem, making them incredibly loyal. Someone who has bought a lot of iBooks isn't likely to give up the iPad -- to do so would be lose access to the digital books they've purchased.

Amazon continues its dominance of the book business
By combining paper book sales with digital copies, Amazon has a huge competitive advantage over its rivals.

Barnes & Noble, already in a precarious state, is heavily exposed. Right now, there are few reasons for book buyers to pick Barnes & Noble over Amazon; Kindle MatchBook makes it only more likely that consumers will go with the Internet retailer. At the same time, Apple may lose out on some iBook customers. To be sure, that won't turn up in the company's bottom line overnight, but it does weaken Apple's iOS ecosystem over the longer term.

Today, $0.31 of every $1 spent on books goes to Amazon. With Kindle MatchBook, that figure should only increase.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 10, 2013, at 5:27 PM, Popnfresh100 wrote:

    Systems combining paper books and ebooks are known as "bundling", and Barnes and Noble has been rumored to be experimenting with different methods for doing it since they introduced the nook. It is a near certainty that they will introduce a competing system.

    The major flaw with Amazon's implementation is that it does not allow for proper gifting or resale. The companion digital rights are simply presumed to belong to whatever account initially placed an order. And of course it is useless if you acquired a book anywhere other than Amazon.

    Barnes and Noble has a patent on a system wherein a store employee places an NFC tag on a book in order to uniquely identify it. This could potentially be used to digitally activate any title someone has in his/her possession (regardless of where it was bought), then later transfer the digital title to any new owner who brings the book in (or scans it with their phone).

  • Report this Comment On September 10, 2013, at 5:29 PM, Popnfresh100 wrote:

    edit:

    transfer the digital title=> transfer the digital license

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