Why Barnes and Noble Shouldn’t Buy Borders

Why Barnes and Noble Shouldn't Buy Borders

Rich Adin has an editorial making the rounds of the ebook world today, where he argues that B&N should snap Borders up for several strategic reasons. His reasons aren’t bad, per se, but I think he underestimates much of the risks and pitfalls in his ideas, and they come from a more idealist view than a realistic business one.

Let’s go through his ideas one by one and I’ll interject where I disagree:

  • First, it can immediately close all the b&m stores that currently compete with its own brand. This would increase traffic to its own brand for those of us who like to shop at real bookstores rather than virtual bookstores. And it could convert Borders members to B&N members; there is a lot to be said for loyalty programs.

My take: Yes and no. It’s not as simple as waving a magic wand and “POOF” the stores are closed. Even if Borders were to enter Chapter 11 bankruptcy, it’s incredibly expensive to shut down a store. There’s inventory concerns (what gets sold at deep discount, what gets sent back for credit), you still need to pay everyone to work through the closing, and there’s likely to be expenses related to breaking leases and other agreements. None of this is free, but let’s assume B&N is very aggressive about cutting costs. Say that the expenses per store run around ~$100,000 to close. Not insane when you consider the expense of breaking down fixtures, paying down the lease, possibly paying for temps if full time employees find jobs, etc. Borders has approximately 500 superstores and another 400 Waldenbooks/Borders Express. Even if they just shut down the superstores, that’s around ~$50,000,000! Granted, a huge chunk of that gets paid for by “store closing!” sales, but if these stores were profitable Borders wouldn’t be in such trouble! I’m being overly dramatic with the numbers, but my main point is that it’s not exactly simple to just say “Oh, B&N can walk in and shut down the brick and mortar stores. Done!”

The best-case for B&N is for Borders to enter Chapter 7, where B&N can then just buy the customer loyalty lists from the court. In Chapter 7 it’s all about liquidating the assets, so B&N wouldn’t have an issue cherry picking what they wanted and leaving the rest to rot.

  • Second, it can replace Borders as a partner in Kobo. This strikes me as a good move for B&N because it would rapidly expand B&N’s ebook reach.

If B&N wanted to partner with Kobo, they could just buy their own way into the partnership. B&N is a far more financially solvent partner than Borders, and if Indigo/Kobo wanted an additional investor they’d probably prefer someone who isn’t likely to renege on their obligations due to pesky liquidity issues.

However, it doesn’t make sense for B&N to own a minority stake in a competitor store. Unless they’re hoping to merge the NOOK platform with Kobo, it’s a waste of B&N’s resources. However, buying a majority stake or equal partnership would make sense, since B&N would actively have control and could bring the whole store under the NOOK banner. Again, if Borders slides into either Chapter 11 or Chapter 7, B&N has a better chance at this than they do now.

  • Third, B&N could become the partner with eBookstores like the Sony eBookstore, which is currently partnered with Borders. Where else could Sony turn? Perhaps to Kobo but if B&N was a significant partner in Kobo, it would still benefit. If you start adding Sony’s and other “independent” eBookstores that are really run by Borders, B&N could suddenly see a significant rise in its share of the ebook marketplace.

Again, I already said why I disagree with B&N partnering with Kobo, but I agree that a Sony partnership might be attractive. It’s a bigger win for Sony than B&N though, since the NOOK line has been enormously popular. Sony could use the boost, and it would spread the potential users of B&N’s DRM to far more places.

  • Fourth, by replacing Borders as a partner with these other “independent’ eBookstores, B&N would be in a position to incentivize these independents to upgrade to the B&N DRM version of ePub, which would expand its marketplace. (Yes, I know it is relatively easy to strip the B&N DRM, but most people don’t/won’t/can’t do it.)

Once again, while I disagree with parts of it, there is something to be said for B&N trying to spread their store to as many places as possible. However, I don’t think they should go the Borders route of having branded apps that are silo’d from the parent store (like Borders eBook app and Kobo’s eBook apps). If anything, they’re better off recreating what they’ve done with Books A Million with other stores, so B&N maintains control and profits and still increases their marketshare.

  • Fifth, it would give B&N a further leg up against both the Amazon and Google juggernauts, something it is going to desperately need it the not-too-distant future.

I agree that B&N needs to be aggressive to capture marketshare, but Borders dying brand isn’t adding anything for them. Taking the money they’d spend on Borders and strengthening their existing relationships is probably the better option. Quite frankly, if Borders was onto anything in the ebook market they’d be crowing about it, and my gut is that it’s a flaming failure for them. Why take it on when B&N’s existing brand is doing far better?

  • Sixth, if B&N were smart, it could cut a deal with Sony to offer the Sony readers as premium readers — for those people who are willing to pay more for higher quality — and have Sony include perks, perhaps such as wireless access to the Sony, Kobo, and B&N ebookstores, that are not currently available on other devices. This would be a boost to both B&N and to Sony.

I think this could work, but only if you cut Kobo out of it. Again, why offer chances for the competition to sell books when you can sell it instead? The cynical part of me also wonders if B&N would love this idea because it would make the NOOK wifi look like an even better deal! In all seriousness, the Sony Readers always strike me as overpriced, but to each his own…and if it sold more books for B&N, they’d sell you any device possible!

So that’s my take on Borders and B&N…personally I think the best outcome for B&N is for Borders to just liquidate. They’ll be the last man standing, and it lets them cherry pick what little they might want from Borders carcass without incurring debt or liability. What do you think? Do you agree with Rich Adin, or do you see my side of things? Share your take below!


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About the Author

Zek has been a gadget fiend for a long time, going back to their first PDA (a Palm M100). They quickly went from researching what PDA to buy to following tech news closely and keeping up with the latest and greatest stuff. They love writing about ebooks because they combine their two favorite activities; reading anything and everything, and talking about fun new tech toys. What could be better?

4 Comments on "Why Barnes and Noble Shouldn’t Buy Borders"

  1. Holy mackerel, that’s just a whole load of crazy. Wasn’t it just a month ago that we were reading that B&N was in trouble, and that one of Borders’ largest shareholders was thinking of investing enough in Borders to buy B&N?

    B&N doesn’t need to buy a company that has greater losses than they do.

  2. Joel McLaughlin | January 4, 2011 at 1:15 pm |

    I think Carly is mostly right but I can see SOME benefit to B&N picking up Borders although I am not sure of how much.

    The great thing if they did is they don’t necessarily have to liquidate all of the old Borders store. They could move stock to one of the established stores. HOWEVER there would be a cost involved in doing this too. It’s probably a wash.

    Personally, I’d like to see Border’s still around, but if they don’t pick up or get bough they are going down in flames

  3. Ackman (Borders guy) confused everyone with that plan. Basically B&N wanted to sell the company to private equity because they felt they were unfairly being beaten up, and Ackman wanted to use Borders as the pawn to invest in B&N.

    B&N was and still is the significantly stronger company.

  4. That’s the thing, in the absolute best-case scenario it’s a wash. There’s not a lot of upside considering the incredible level of expenses in running ONE retail outlet, let alone two.

    It probably wouldn’t be as simple as just moving inventory. It would require moving the credit agreements, accounts receivable and payable, etc…the reconciliation alone would be a nightmare of legal and accounting messes. The best they could do is return everything possible to the distributors and then re-order/redistribute, but again, that’s not cheap.

    The problem is that no one can list anything Borders brings to the table besides a customer list. There’s a good chance B&N already has information on a big chunk of those customers, and more than likely the mailing list will be up for sale if Borders goes Chapter 7.

    Whatever Borders has, B&N already has and makes more money from it. And the book industry is so skittish about Borders dying and B&N potentially struggling in the future that I can’t see an upside to B&N incurring massive debt to buy a dying, useless competitor.

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