When Galley Cat invited me to make some predictions for the coming decade, I conjectured that sometime in the near future we would see the merger of a major retailer and a major publisher. Here was my reasoning: “A combined publisher/retailer solves many problems for both.The retailer owns the content and doesn’t have to pay a premium for it. The publisher does not have to pay a premium to distribute its books. There would be huge efficiencies of manufacturing and distribution.”

I’ve had about a month to think about what I said, and I want to revise it. The efficiencies of a retailer/publisher combine would not merely be huge. They would be decisive. If you don’t believe it, ask Barnes & Noble and Amazon.

In 2003 Barnes & Noble acquired Sterling Publishing, described at the time as “one of the top 25 publishers in America and the industry’s leading publisher of how-to books.” Publishers were gravely concerned, and they had every reason to be. Barnes & Noble’s own titles were like a supermarket’s house brand, often undercutting the prices of outside purveyors.

And now Amazon is a publisher too. It started with its Encore program aimed at identifying overlooked books and authors. That was followed by the creation of a service called CreateSpace aimed at self-published authors. And now Amazon has begun publishing mainstream authors like Stephen King and recently acquired Stephen (The 7 Habits of Highly Effective People®) Covey for the Kindle.

The potential for mischief created by such combines was cogently articulated a few years ago by Morris Rosenthal and I urge you to read it. In essence, the savings generated by dissolving the barrier between seller and buyer enable the combine to lower prices below – sometimes far below – those charged by publishers that do not own their own retail branch. To state the case as simply as possible: Barnes & Noble and Amazon.com, the two most powerful retailers in the book business, have become competitors of the very publishers they serve.

Though these retailers have no qualms about becoming publishers, publishers on the other hand are terrified of becoming retailers for fear of provoking the wrath of their key accounts – B&N and Amazon! When publishers do dip a timid toe in the water and try to sell their books direct to the consumer, they offer them at full list price, which cannot possibly compete with the deeply discounted prices charged by B&N and Amazon. Yet, if they wanted to, publishers could sell their books directly to the public at 40% discount or higher and thus level the playing field.

The solution? To survive, to remain competitive, publishers may have no choice: they must either become retailers or end up being acquired by them.

At this moment Borders, one of the best and most popular bookstore chains in the business, is in a life and death struggle to remain viable. If a publisher were smart it would rescue Borders and go into the retail business.

Retailers, I said a while ago (see Direct Sales: Publishing’s Last Stand), are intermediaries in a world that is rapidly disintermediating. As big as they are, retailers like Barnes & Noble and Amazon are vulnerable to market forces bent on eliminating middlemen, and that’s precisely why they have begun publishing books. The digital revolution demands a direct relationship between content provider and consumer. Merging a publisher and a bookstore like Borders would bring both struggling enterprises a little closer to that direct relationship, to profitability and to competitiveness.

Do I hear any bids?

Richard Curtis

Publishers Weekly just issued a bulletin that “the board of directors of the American Booksellers Association requested that the government begin an investigation into what the organization believes is the illegal predatory pricing policies being carried out by Amazon, Wal-Mart and Target in selling 10 hardcover titles for as low as $8.98. The ABA requested a meeting with officials as soon as possible, arguing that left unchecked, the predatory pricing policies ‘will devastate not only the book industry, but our collective ability to remain a society where the widest range of ideas are always made available to the public.’”

PW‘s Jim Milliot writes:

“The letter charged that the big box retailers are using predatory pricing practices to ‘attempt to win control of the market for hardcover bestsellers.’ By selling books below cost, Amazon, Wal-Mart and Target ‘are devaluing the very concept of the book. Authors and publishers, and ultimately consumers, stand to lose a great deal if this practice continues and/or grows,’ the letter stated. Furthermore, the letter noted, the companies involved in the price war are not engaged primarily in selling books, yet their fight could result in the entire book industry becoming collateral damage.

“The letter added that the price war over hardcovers was precipitated by Amazon’s decision to price e-books at $9.99. “We believe the loss-leader pricing of digital content also bears scrutiny,” the letter stated.”

From time immemorial, loss-leader pricing has been an instrument to drive competitors out of business. But with so many retailers and big-box stores joining in the sale of books below cost, the ones being driven out of business are publishers, authors and independent booksellers. We don’t know if ABA has a case but kudos to them for trying.

Richard Curtis

In one of the most astounding turnarounds in recent memory, Publishers Weekly‘s Stock Index soared 23.9% in the first six months of 2009 according to Reed Business Information. The Dow Jones Average for the same period dropped 3.7%.

Leading the recovery from the Death Valley Days of ’08′s holiday season was Borders. Had you been shrewd enough, or crazy enough, to buy Borders stock at the end of last year when it lay moribund at 40 cents, you’d have been sitting pretty on June 30th with shares valued at $3.68, a bounce of 820%. Other retailers prospered too. Books-A-Million shares rose 178.8% and Barnes & Noble 37.5%. The latter is ironic, given B&N Chairman Len Riggio’s lament in November that the holiday season was the worst he’d seen in three decades, and he saw little light in the tunnel for 2009.

It’s hard to say what accounts for the rebound. Obviously, financial pundits underestimated the staying power of printed books. That’s an understandable error in view of activity in the high-flying e-book sector, which may have instilled Print Is Dead pessimism in investors. Or it may simply be that retailer stocks were simply way underpriced and primed for a correction.

Whatever the explanation, the numbers are encouraging if not inspiring, and we’re particularly happy to welcome Borders back to the land of the living. Hey publishers, you can start shipping to Borders again!

Check out the stats in Retailers Enjoy Big Bounce.

RC

Every blogger owes a debt of gratitude to newspapers and magazines. This posting relies on original research and reporting performed by Reed Business Information and Publishers Weekly.

Just when we thought the financial status of Barnes & Noble could not be more perplexing – it got more perplexing. B&N-watchers will recall that in November B&N czar Len Riggio announced the worst holiday season in memory and predicted the affliction would continue well into 2009. Why then did media mogul Ron Burkle buy an 8.3% stake in Riggio’s company, as announced last week?

But wait, it gets even more mystifying: according to Publishers Weekly, “Pershing Square Capital Management has dumped its entire stake of Barnes & Noble stock.” That comes to 11.8%.

In short, if things are so terrible, why is someone buying in? And if things are so wonderful, why is someone cashing out?

To add to the intrigue, PW speculates that this move now puts William Ackerman, Pershing’s head, in a position to put his “entire focus on Borders” and possibly take the chain private. Yet for some time Borders’ pulse has barely been fluttering.

Where is Lewis Carroll when you need him?

La commedia di B&N non e finita, so watch this space for Act II, Scene 2.

RC

Borders has a new CEO, Ron Marshall, and he’s been putting in a lot of time on the horn assuring publishers that though his bookstore chain has been taking a lickin’ it keeps on tickin’.

This according to the Wall Street Journal. “Publishers and other suppliers said that Borders is currently paying its bills,” says WSJ. “But the retailer has been aggressively selling assets, slashing costs, laying off employees, and reducing debt to stave off the kind of financial crisis that could result in a Chapter 11 bankruptcy filing.”

Borders is in a classic bind because some publishers have been supplying books in cautious quantities, and others may not have supplied any at all until they see if the chain survives. But standing on the umbilical could only accelerate the chain’s demise. Which puts publishers in a classic bind of their own: if Borders fails, publishers that withheld product will bear responsibility; if it survives, those same publishers will lament lost sales opportunities.

In any event, at least, as of 5 AM on Friday, January 9, 2009, Borders can sing, “I’m still here.” Just bear in mind that the name of the Sondheim show that tune appears in is “Follies.”

Meanwhile, Borders’ rival Barnes & Noble got an infusion of optimism when it was announced that Yucaipa, a private equity outfit owned by billionaire investor Ron Burkle, had bought 8.3% of the company’s stock for about $67.3 million. Does anybody find this odd? A month ago B&N czar Len Riggio was lamenting that the 2008 holiday season was shaping up the be the worst he’d seen in three decades, nor did he see much light on the 2009 horizon.

What does Ron Burkle know that the rest of us don’t?

Don’t leave the theatre. Act II of Follies is about to begin…

RC