Are Books Going Away?

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Barnes & Noble (NYSE: BKS) has been having a hard time of it lately. Technology advances are largely to blame. Still, in the book business, the company is a clear leader. Will the company's plan to close stores on a regular basis over the next decade be enough to fend off technology powerhouses like (NASDAQ: AMZN) and Apple (AAPL)?

An Industry in Flux
While took the book industry by storm by undercutting brick and mortar stores on price, the smaller industry participants took the biggest hit. Indeed, local shops simply couldn't compete with the selection and ease of shopping online for what is basically a commodity item. Add in the avoidance of sales taxes, a distinction that is going away today that Amazon initially enjoyed, and the price discrepancy got even worse.

Large book stores, however, were able to hang on, at least for a little while. Barnes & Noble and Borders, two of the largest book sellers, still drew crowds and were able to start their own online services, something a mom and pop store simply couldn't do. However, as Internet buying increased, the book industry began to look overcrowded. Borders eventually succumbed to the competition, particularly after Amazon launched its Kindle reader.

Digital Books
The digital reader was a game changer. Not only was Amazon selling books online, but it was delivering them instantly in an easy to carry format. Competitors have tried to bring out similar devices, but none have grabbed customers' attention like the Kindle. Barnes & Noble's Nook is a distant second.

Apple's introduction of the iPad, interestingly, made matters worse and better at the same time. For example, the product made it more difficult to get customers into stores, since they could easily and device agnostically shop for books from the comfort of, well, anywhere they could get a cell signal. The reading experience on the larger device was pleasant, too.

On the positive side, however, both Amazon and Barnes & Noble were able to piggyback on the new device and sell products without the reliance on customers buying bookstore specific technology gadgets. That was a breath of fresh air, and a big support to the two fledgling consumer product makers, with B&N probably benefiting more because of its late start in the book reader space.

Paper is Dead, Long Live Paper
So, in general, the brick and mortar book business is mature, at best. More likely, technology advances have pushed it into a slow decline. Thus, Barnes & Noble has plans to trim its store count by as much as a third over the next decade. However, the company is to books what Home Depot (HD) and Lowe's (LOW) are to hardware. In many locations, B&N is the only notable book store around.

In fact, management reports that the vast majority of its stores remain profitable. There is no doubt that people like to get out of the house and shop, so brick and mortar isn't inherently dead. Thus, management's plans for a slow culling of stores is probably right on target.

Interestingly, as the larger players have felt the pinch of technology changes, niche local bookstores, offering knowledge and a pleasant shopping experience, have managed to make a bit of a comeback.  This fact hasn't gone unnoticed at Barnes & Noble. The company has long worked to make its stores more appealing, including such things as coffee shops and free Internet connections as part of the customer experience. The stores have always featured comfortable décor and ample seating.

Powerful Friends
Management seems to realize that there are now two sides to its business, one digital and the other experiential (book stores). With the later in decline, it has plans to slowly trim its tore count. This makes complete since. On the other side, the company has ramped up its spending on its digital business. In that, it has been befriended by Microsoft (NASDAQ: MSFT), which has taken a position in the Nook business.

Microsoft has done a similar deal with Nokia (NOK), in which the software giant helped to underpin the cell maker's new phone. A mix of cash and technological support, via Nokia's use of Microsoft's mobile operating system, has led to the Lumina's solid reviews and early sales success. This could help Microsoft become the number three player in the mobile operating system space.

The deal with Microsoft has given B&N an inflow of cash it can use to bolster its technology. Note that it recently launched two new, and seemingly well received, versions of its Nook reader. However, spending on the Nook has helped to push the company's results into the red. Microsoft, however, is a deep pocketed friend and one that offers material customer synergies.

Perhaps more importantly, Microsoft working with Barnes & Noble puts that company right into Amazon's backyard. This, then, is a very strategic push against a competitor that has increasingly encroached on Microsoft's turf. Amazon's efforts in the cloud computing space is just one notable example. So Microsoft clearly benefits from a stronger B&N, which may lead to more support over time, if it is needed.

There's Still a Place for Stores
In the end, Barnes & Noble is definitely going through a hard time as it adjusts its business from a retail store based model to one that increasingly includes digital technology. Still, stores aren't dead and the store closures are more of a sign that the company is right-sizing its brick and mortar business than it hanging up a “going out of business” sign.

There are plenty of execution risks here, so conservative investors should probably stay away. However, more aggressive types who believe the digital world can coexist with the physical one could find the recent share price malaise a buying opportunity. Having Microsoft on your side is a definite plus, too.


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ReubenGBrewer has no position in any stocks mentioned. The Motley Fool recommends The Motley Fool owns shares of and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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