The wild card in Kindle vs Nook – B&N’s balance sheet

There are a lot of different angles that are discussed when it comes to the Kindle and the Nook. However, one that is often overlooked is how different the companies behind them are. In particular, 

  • B&N is a brick and mortar bookseller expanding into selling more than just books and also expanding into selling eReaders and eBooks.
  • Amazon is a company with a lot of very different sub-businesses – both established and emerging. One of the established businesses is selling books and two of the promising emerging businesses are Kindle and Kindle Store.  

The fact that the Kindle stirred up interest in eReaders and reading has made a lot of the press and a lot of people assume that it is critical to Amazon’s future – that it is the foundation on which Amazon’s survival depends. This is so far from the truth that it’s absurd.

There are also lots of queries from people about what happens if Amazon goes bankrupt – based on some notion that Amazon is a company in danger of going bankrupt sometime soon. Surprisingly, no one seems to be asking the same questions about Barnes & Noble – Could they go bankrupt? How dependent are they on Nook and book sales?

Well, this post is going to ask these questions. Let’s start by understanding exactly what businesses each company is in and how these businesses are doing.

Amazon as a profitable conglomerate

Amazon basically wants to be the Buying destination – the place you can buy everything (and do). Amazon have multiple main lines of business -

  1. Physical Media (Books, CDs, DVDs) in the US.
  2. Electronics in the US.  
  3. Physical Media in UK, Japan, China, Canada, France, and Germany. 
  4. Electronics in these countries.  
  5. Selling everything else in US and outside the US.
  6. Amazon Web Services (Cloud Computing). They are the #1 cloud computing provider and get more traffic from their Cloud hosted sites than from their own sites.
  7. Kindle Hardware.
  8. Kindle Store.
  9. Amazon Wireless Store and Amazon Tote (grocery delivery). 
  10. Digital Downloads of Music, Movies, and TV. They are a top 3 digital music seller in the US (after Apple and WalMart).
  11. Clothing and Shoes sales through non-Amazon sites – Zappos.com (shoes and clothes), Shopbop.com (clothes), Endless.com (shoes), Fabric.com.
  12. A wide portfolio of sites – Drugstore.com, IMDB.com, Pets.com.

That’s 12 separate lines of business – at least 5 of which (Physical Media, Electronics, Cloud Computing, Clothes, Shoes) might be more important to Amazon than either Kindle or the Kindle Store (even in the long term).

Amazon is doing really, really well financially

Here are some details from Amazon’s last quarterly earnings release (Q1, 2010) -

  • North American sales of $3.78 billion – up 47%.  
  • International sales of $3.35 billion – up 45%. 
  • Media sales grew 22%. 
  • Electronics sales grew 68%.
  • Profits of $299 million.
  • Cash in hand of $1.844 billion.
  • Total Assets of $12.04 billion and total liabilities of $6.424 billion.

This might not be Microsoft level of profitability or Apple level of profitability – However, it’s pretty solid. This isn’t a company that needs either the Kindle or the Kindle Store to make it profitable. It would definitely help – However, it’s not a prerequisite for success or survival.

B&N as a struggling bookseller

There aren’t 12 lines of business for B&N. Here is what it has -

  1. Barnes and Noble Bookstores – 777 stores.
  2. Barnes and Noble College Bookstores – 636 stores. 
  3. Selling things other than books at their bookstores.
  4. Nook.
  5. B&N ebook store.
  6. Book Publishing.

We’re really stretching things here as B&N primarily has 3 businesses - bookstores, the Nook, the ebook store.

As opposed to adding new lines of business B&N has been selling off businesses - its GameStop video game stores were spun off as a separate company and B&N liquidated the B. Dalton Booksellers line of bookstores.

B&N is struggling mightily

Here are some snippets from B&N’s last earnings release (Q4, 2010) -

  1. Total sales of $1.3 billion – an increase of 19% from the year ago Q4.  
  2. BN.com sales increased 51% to $141 million. 
  3. Store sales of B&N decreased 3% and store sales of College bookstores increased 2.9%.
  4. Net loss of $32 million for the quarter.  
  5. For the previous year (previous 12 months) total net earnings of $36.7 million. 

They lost almost as much in the most recent quarter ($32 million) as they earned in the entire previous year ($36.7 million). That’s not a very pretty picture.

People are finally beginning to notice -

Now, consider B&N’s guidance -

  1. B&N expects sales to increase 20 to 25%.
  2. Sales from BN.com are expected to increase 75%. The store sales are expected to be flat.
  3. It expects its earnings per share for 2011 to be between breakeven and a loss of 40 cents per share due to deferring revenue from Nook eReaders (B&N splits it across a 2 year period).

This is a company that is struggling and is heavily dependent on its Nook eReader and eBook store taking off.

Its great to hear that BN.com is up 51% - Unfortunately BN.com sales make up only 11% of sales and store sales (the other 89%) are stationary. Of course, B&N have their assets to fall back on in case of extreme emergency -

  1. Total Assets – $3.7 billion.
  2. Total Liabilities –  $2.8 billion.

Their reports are rather confusing so there may be some mistakes. However, it seems like B&N only have $900 million or so of actual assets they could use in case of emergencies.

Value of books and ebooks to Amazon and B&N

Consider the hypothetical situation where both Amazon and Barnes & Noble lose out in eBooks and eReaders.

Amazon simply shifts to its 9-10 other businesses

Amazon simply refocuses on its established businesses (physical media and electronics in US and outside US) and its emerging businesses (cloud computing, clothes, shoes, all its websites, digital downloads of music and movies).

Even if we consider the Kindle and Kindle Store to each be billion dollar a year businesses – losing out on them is not a big deal. Amazon has quarterly sales over $7 billion and is growing at 45%. It also has $5.5 billion in assets and quarterly profits of $299 million.

Extrapolate out lost physical book sales (assuming some other ebook company steals them) and it’s still $1 billion to $1.5 billion a quarter (at most) - Amazon still has $5.5 billion a quarter in revenue.

B&N has only bookstores left

Barnes & Noble is left with nothing except its bookstores. Except they are growing at 2% and B&N is making losses. It also has only $900 million in assets to fall back on. B&N did exactly the right thing by getting into ebooks and eReaders – However, it needs the Nook to succeed very badly.

Plus if physical books keep losing market share to ebooks and Nook hasn’t succeeded – B&N’s situation keeps getting worse.

Nook for B&N is survival, Kindle for Amazon is a smart bet

If both Kindle and Kindle Store continue to succeed Amazon gets two important new channels. If only one does it gets a good, solid, new channel and misses out on an opportunity. If both fail then Amazon simply misses out on something that could have been 5% to 10% of its revenue.

The Kindle and the Kindle Store are just two out of a dozen or so Amazon bets on the Future.

This is a characteristic of very smart companies – To outsiders it seems that they are betting the farm on a risky new venture on which the entire future of the company depends. Internally it’s just a smart new bet that is only relevant to the company if it pays off.

Whether you look at Amazon and its bets on Cloud Computing and the Kindle, or at Apple and its bet on the iPad, or at Microsoft and its bet on Bing – it’s the same pattern. Each of these companies has solid, well-established billion dollar businesses that ensure its supposed risky, crucial bets are relevant only if they succeed.  

Crucially, they don’t just have a single billion dollar business - Apple has iPod, iPhone, Mac, and iTunes; Microsoft has Windows, Office, Server Tools, Xbox, Xbox Live, Sharepoint, and Developer Tools; Amazon has Amazon.com, Amazon sites outside the US, Zappos.com and Endless.com, Cloud Computing, and lots of websites.

Bing, the Kindle, iPad – Press and people seem to think the future of the companies depend on these individual products. Only if they are wild successes - in every other case they are just bets that didn’t pan out. This is illustrated by Apple selling 1.7 million iPhone 4s in the first weekend – the 2 million iPads in the first 2 months don’t seem that important now do they.

Amazon does not need Kindle to survive. However, B&N desperately need the Nook to succeed.

If you had to put money on Kindle vs Nook, which one would you pick?

This is a question worth asking the next time someone brings up a hypothetical ‘Amazon might go bankrupt and you might lose your ebooks’ question. You can’t lose your ebooks because you can back them up and strip DRM – However, you won’t have to take such measures.

Amazon has over $7 billion a quarter in revenue, a 45% increase in revenue from the year-ago quarter, $299 million a quarter in profits, and $5.5 billion in net assets. It also has 12 different lines of business out of which 9 are almost sure bets to be profitable billion dollar businesses.

The wild card in Kindle vs Nook is not whether Amazon will survive – It’s whether B&N can survive and whether it has the resources to keep competing. There are very few tech companies that have multiple billion dollar businesses and very high chances of surviving for the next 10-50 years (Microsoft and Apple are two) and Amazon is part of that group.

As long as the Kindle and the Kindle Store are owned and run by Amazon the last thing you need to worry about is whether they’ll be around – They are both potential billion dollar businesses which Amazon isn’t dependent on but would love to have as profit generating parts of its empire.

2 Responses

  1. I recommend that WSJ link. All free cash flow through end FY2011 is going to set up Nook and BN.com. That is not a healthy competitor.

    Just do a few scenarios where B&N is in real trouble. All believable:
    1. ‘Double dip’ recession hits sales increasing losses.
    2. Boarders e-reader sales cut into BN.com (and let’s pretend Kindle sales too… but that doesn’t hurt Amazon notably while it cripples BN.com).
    3. Interest rates go up (less likely).

    In all 3 scenarios, Amazon survives and thrives. Perhaps a year of losses.

    Now look at B&N and Borders. Borders is effectively a spoiler. As long as they exist, they weaken B&N. When they fail (not if), it will *dramatically* strengthen B&N. But when? How strong will B&N be at that juncture (hint: not very).

    4. Will be have POD (Print on Demand) Kiosks by then?

    I’ve been waiting a long time for retail POD to take off:
    http://www.teleread.com/2008/08/13/a-pod-of-coffee-the-espresso-print-on-demand-kiosk/

    (Yes, that is a 2008 article.) Eventually it will. When POD Kiosks make it into 50+ airports… that will be the start of the end of brick and mortal stores. B&N had better become a stronger player before someone perfects a POD Kiosk. I found 3 vendors trying to get the machines working. If one can shrink it to economically fit into a corner of an airport bookstore… With their cash, Amazon is the only one who could enter that market.

    Neil

  2. People will always love real books. There is room for Ebooks but Barnes & Noble has put all of their eggs in one basket neglecting the fact that they are a bookstore and have to retain their image. It was wrong of them to close all of the B. Dalton stores, because they are probably close to the model that Barnes & Noble stores will become with the exception of the cafes. Barnes & Noble has also added cheap toys that you can buy at Walmart. Someone had better get a hold of them and deversify them in the right direction.

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