27 February 2013

The B&N fallacy

Ebook retailers should stop making hardware and stop making ebook reading apps.

This blog post is written in the time-honoured fashion of blogging where I aim to clear up what I think is a common misconception, get carried away, and spiral into an almost philosophical point on bigger issues.

The misconception that serves as the seed here is the idea that Barnes & Noble is in the devices business. They aren’t. Far from it.

You can see it in almost every commentary on B&N’s recent setback. People talk about them being an also-ran in the tablet business, that their experiment in the device business has stalled and things along those lines.

B&N isn’t experimenting in the device business. They’ve had a laser-like focus on a single model: a infrastructure-heavy customer relationship business.

Or, in other words, storefronts.

—That really doesn’t make sense. They make and sell devices. Ergo, they are in the devices business. Q.E.D.

I disagree. Devices are a cost centre for all major ebook retailers. It isn’t a part of the business model but infrastructure for their business model.

The mistake B&N did wasn’t in making sub-par devices but in thinking that subsidised tablets were a good investment for building the foundations of an infrastructure-heavy digital storefront.

They aren’t. Which is something I personally think Amazon and Kobo are also going to discover. Tablet and phone churn is much too high and you are constantly competing with groups like Apple and Samsung. Those two do the whole devices thing for a living and are very good at it, much much better than any book retailer is ever going to be.

Anybody who thinks that a 300–400 dpi 4–5 inch smartphone isn’t a first class reading device hasn’t laid their hands on one.

—But that’s just another way of saying that they make crap devices?

No, it isn’t.

B&N, Kobo, and Amazon fundamentally aren’t in the business of making devices. Almost all of their devices are going to be primarily designed and manufactured by Asian original design manufacturers (ODMs). Some of the design and manufacturing partners are going to get better and better at making those devices, subsidised by short-sighted book retailers, until they are good enough to enter the market on their own terms and leave the retailer screwed with no market share (i.e. do to the retailers exactly the same thing that AsusTek did to Dell and, arguably, what Samsung did to Apple).

Also bear in mind that almost anybody with a line of credit can walk up to these OEMs and ODMs and buy the exact same device design and manufacture services. No book retailer has a real core competency in devices.

So, they are going to be caught between their ODMs on the one hand and successful tablet and phone manufacturers like Apple and Samsung on the other. Rock. Hard place.

Subsidised hardware as distribution infrastructure is a dumb dumb tactic and it demonstrates a singular lack of vision.

—What B&N should do is make a better device, one where the tablet’s operating system isn’t crippled by the vendor.

No, they shouldn’t. They’d just mess that up as well because the problem isn’t the quality of the device but the dynamics of the business model surrounding the device and the value network of the company making it.

Because you people never follow links even though you should (I know, I checked) I’m pasting the relevant bits about value networks below:

The concept of the value network—the context within which a firm identifies and responds to customers’ needs, solves problems, procures input, reacts to competitors, and strives for profit—is central to this synthesis. Within a value network, each firm’s competitive strategy, and particularly its past choices of markets, determines its perceptions of the economic value of a new technology.

These perceptions, in turn, shape the rewards different firms expect to obtain through pursuit of sustaining and disruptive innovations. In established firms, expected rewards, in their turn, drive the allocation of resources toward sustaining innovations and away from disruptive ones. This pattern of resource allocation accounts for established firms’ consistent leadership in the former and their dismal performance in the latter. (Clay Christensen, The Innovator’s Dilemma)

Barnes & Noble make storefronts. No matter how many devices they make, no matter what device strategy they try, what they release will always end up being a storefront masquerading as a consumer device. Changing that would require firing everybody who currently works on the Nook and building a new, isolated and insulated, business unit elsewhere, preferably on the other side of the continent, and treat it like a well-funded startup.

That’s obviously not going to happen.

—What about the eink devices?

Fine. I’ll give you eink devices. Compared to LCDs and OLEDs eink screen evolution is glacial. That, along with the low performance requirements of most eink reader activity, makes these devices ideal for the subsidised hardware as distribution infrastructure strategy. Churn is lower than with phones and tablets. Change is slower. Older models are likely to remain in use longer.

Keep on making eink readers as long as there is demand. Of course, the popularity of tablets and big screen phones means that demand is softening so now might be the exact right time to stop developing them and let them peter out quietly.

—What should B&N do?

I’m glad you asked. Others have answered this question elsewhere, like Joe Wikert.

The short version:

Those are all good but I’d argue that doing this wouldn’t solve B&N’s problem in the long term.

What I suggest they do is discontinue their reader app development as well.

—Now I know you’re insane.

Bear with me here. One of the biggest expenses with an app-oriented ebook retailer is the reader app. One of the biggest expenses (i.e. time waster) for publishers is testing for reader app compatibility and dealing with reader app differences. And from the reader’s perspective reading apps are pretty much interchangeable commodities. Beyond startups like Readmill, precious few of those apps have any distinguishing features or innovations.

So, my suggestion would be to scrap the reading app and just license someone else’s. Bluefire Reader is a decent, well-made app and seems to be the current safe bet. A slightly more off the wall bet would be to do some sort of deal with Readmill. Or, if B&N can talk publishers off the DRM ledge and onto the watermarking perch, they could just switch to using iBooks when on iOS and have a book delivery app that doesn’t do anything but notify people when new books are ready to be copied into iBooks. Going the watermarking route would also enable readers to just use their favourite app for everything.

The good thing about this approach is that it doesn’t require a corporate culture transplant. It means their business would fundamentally come down to making a better storefront and discover new, sustaining, commerce innovations which is a priority that B&N should be able to understand and perform on.

It’s not as if reading app features are a point of differentiation for ebook retailers. If they were, the existing feature set across the ebook reading app market wouldn’t be so undifferentiated and boring. And the most popular reading app on iOS wouldn’t be that massive suckiness singularity that is the Kindle app.

But the prevailing feature set is undifferentiated and the Kindle app does suck. Having your own reading app and dev team isn’t a point of differentiation. However, having a good reading app is essential to an ebook retailer’s business. The easiest way to get there from here, and the easiest way to stay on the road to there and not veer into the wilderness of what-the-fuck, is to license a reading app from people who do those apps for a living.

Most of these suggestions go for Kobo as well:

I’d flip that suggestion around for Apple. I’d like to see them discontinue the iBookstore, stop asking for 30% of ebook retailer in-app revenue (lower it to, say, 5%), and offer iBooks as a more generic webview-style ebook reading API and view so that anybody can integrate a top-notch ebook reader with next to no effort. The iBookstore is chump change for them anyway and it would massively level the playing field while still netting them a token slice of the overall iOS ebook cake.

The good thing about separating reading apps from retail is that the negative consequences of outsourcing/licensing complementary tech expertise in hardware become positive in software.

The hardware ODMs improve until they become a power of their own and disrupt your loss-making hardware business. You’re basically subsidising their prep for screwing you royally. But as the licensed reading apps improve, all that happens is that everybody’s overall experience improves. Readers benefit. Ebook retailers benefit since better apps mean more readers and more reading by each reader, which means more sales. Ebook reading software houses benefit since improving ebook retail sector means more licensing revenue. Everybody involved in this model has plenty of incentives to work in a way that benefits others. Retailers work on the storefront and customer service and won’t try to do development because it’s a fast paced world requiring a dynamic and flexible business. Development houses improve the apps and won’t try to do retail because it’s a huge, infrastructure-heavy business that requires a lot of staff and staff training.

Because reading apps are a complement to an ebook retail business, retailers really really should want them to become high quality commodities. And that’s never going to happen as long as they continue with their own in-house reading app development teams, not to mention their format forks.

—I’m not talking to you anymore. I’ve flipped the bozo bit on you. Jerk.

Fine. Whatever. Get out of my head then. Arsehole.


ETA: Mike Cane has replied to my post over on his blog. His points are all good. We both agree that B&N is in a very difficult position.

And there are a few interesting comments on this post on Google+. If you want to make comments or other remarks, that G+ post seems to be the place to go to.

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