As I pondered Borders' (NYSE: BGP ) most recent quarterly loss (unfortunately, nothing new for the beleaguered bookseller), I suddenly realized something. The biggest challenge for this company may not be what everybody thinks right now. It might be something huge and formidable that's brewing on the horizon.
Granted, Borders has had major problems for several years. Competition is cutthroat and includes not only straight-up rivals, but also discounters like Wal-Mart (NYSE: WMT ) and Costco (Nasdaq: COST ) . It was struggling in good economic times, and it hasn't posted an annual profit in several years. And now, with consumer spending not exactly robust, it's even more difficult to stage a turnaround.
However, the really scary thing that Borders faces is one of the most daunting for any company: industry disruption. Again.
A falling tide wrecks all boats?
Our economy's in a serious recession, and not surprisingly, the publishing industry itself is in the doldrums right now. According to the Association of American Publishers, book sales in March dropped 17%, and were down by 6.8% for the year.
Obviously, if books aren't exactly flying off the shelves, it's that much harder for Borders, since books are its bread and butter. Granted, it also makes it that much harder for its better-positioned rival Barnes & Noble (NYSE: BKS ) and less super-sized rival Books-A-Million. Although Borders strikes me as the most troubled of the three, the truth is, I wouldn't want to invest in any of those stocks right now.
However, I'm not worried about Amazon.com (Nasdaq: AMZN ) , even though one of its major products is books.
That's because Amazon is on the absolute right side of a major disruptive influence that appears to be overtaking the entire publishing and bookselling industry. Again.
So, yeah … what was that about industry disruption?
Amazon already wreaked havoc in this industry by its very existence as a low-cost, non-brick-and-mortar e-tailer. Now it's at it again. The data I cited above about book sales included one important anomaly, and that is that the sale of e-books soared 110% in the month of March, and 131% for the year. Granted, the March sales figure for e-books only represents about $10 million, a fraction of the $80 million in sales for the total space in March. Still, e-book sales are clearly on the rise, and this huge percentage jump reflects the fact that consumers are beginning to take to them, in no small part due to Amazon's Kindle.
Indeed, it's pretty easy to surmise the March figures reflect the fact that Amazon launched its second-generation Kindle device on February 23. Meanwhile, although it doesn't reveal sales figures related to the Kindle, or even how many it has sold, it has said that for books where a Kindle version is available, a formidable 35% of the sales are the Kindle versions. (Remember, Amazon doesn't even pay out for any marketing for the Kindle; rather, the device is already hot simply through word of mouth and the permanent real estate on the Amazon.com main page.)
It looks to me like Amazon's Kindle is doing exactly what many people thought it would. It's following in Apple's (Nasdaq: AAPL ) footsteps with the iPod, i.e., making the shift of content from physical to digital form viable for mainstream consumers by providing the convenient, must-have device to consume that digital content.
And we all know the recording industry is still trying to adjust to that seismic shift. Meanwhile, remember the fates of music selling mega-chains like Tower Records? If the publishing industry adapts to this disruptive change, it has a shot (and there are some rumblings that it's not going to, given its pushback against Google's (Nasdaq: GOOG ) electronic book efforts as well as grumblings about the $9.99 price Amazon has been targeting for Kindle versions, which sounds like its echoing the recording industry). But regardless, brick-and-mortar bookselling superstore chains may be toast as books go increasingly digital.
Are you on the right side of the equation?
When industries face disruption, there's usually some combination of innovation on the part of the forward-thinking companies, and fear on the part of the traditional ones. Investors do not want to be buying stocks in the fearful companies that are desperately trying to hold on to the past because there's a good chance those will be wiped out as disruption alters industries forever.
Investors must be on the "innovation" side of the spectrum, investing in companies that not only accept but also embrace the innovations of the future.
If looking for stocks that are on the vanguard of industry disruption and innovation is your idea of a good time, you might want to consider a free trial to our Motley Fool Rule Breakers service. Motley Fool co-founder David Gardner and his team of analysts make searching for such revolutionary companies part of their mission. In fact, Google, which has also long been working within the inevitability of the digitization of content, is a Motley Fool Rule Breakers pick.
When industry disruption occurs, it creates big winners and huge losers. Don't let yourself be on the side of the equation that's destined to lose, but instead, search for the winners.
Google is a Motley Fool Rule Breakers recommendation. Apple, Amazon.com, and Costco are Motley Fool Stock Advisor recommendations. Costco and Wal-Mart are Motley Fool Inside Value picks. The Fool owns shares of Costco.
Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.
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