End-Game for Borders and Blockbuster?

Blockbuster logoBorders logoTwo items reported this past week are yet more bad news for one of the most beleaguered sectors of the retail industry. Borders Books & Music will be filing for Chapter 11 bankruptcy and Blockbuster is preparing itself for sale.

Does this mean we’ve now reached the end-game for these iconic brands – and for the entire retail book/movie store segment?

Actually, we’ve seen this play out before. Less than 15 years ago, Tower Records and Sam Goody were two vibrant national chain store operations selling CDs and other recorded music. But these and most other music merchants are now history.

In fact, the only bricks-and-mortar music retail segment remaining is made up of used record and CD stores – typically one or two shoestring operations operating in major urban markets that manage to eke out a hand-to-mouth existence.

It appears that the same thing may now be happening to books. Consider Borders. It’s tried all sorts of ways to branch into other revenue-producing endeavors to make up for the consumers’ shift to buying books online or downloading to e-readers. Those endeavors have included coffee and juice bars, greeting card kiosks, giving customers the ability to download books and music, and even to explore genealogy and family history. Despite all that, Borders has been unable to stem the decline of its business.

Mike Shatzkin of consulting firm Idea Logical Company contends that the problem is bigger than Borders. He believes bookstores are going the way of music stores. “I think that there will be a 50% reduction in bricks-and-mortar shelf space for books within five years, and 90% within ten years,” he predicts.

The immediate question is whether Borders will be able to restructure its business, or in the end will be forced to liquidate. Borders’ debt is so high (it’s expected to report nearly $1 billion in liabilities when it files), the company is already committing to closing about a third of its ~675 Borders and Waldenbooks store outlets.

It’s possible that book superstore rival Barnes & Noble will see at least a short-term gain from Borders’ travails. It’s a larger entity and is doing better financially. Gary Balter, an analyst with Credit Suisse, believes Barnes & Noble could add as much as $1 billion in sales if Borders ultimately goes out of business.

But that kind of benefit may well turn out to be temporary. After all, Tower Records benefited from the closure of Sam Goody – for a time. But ultimately, Amazon and online sales were the big winners, and there’s every indication that they will be the main beneficiaries now as well.

In the movie rental business, things aren’t any better. I’ve blogged before about the challenges faced by Blockbuster, the nation’s leading movie-rental chain that went into Chapter 11 bankruptcy in September 2010. The company is now preparing itself for sale, but there are ominous signs that the initiative may be stillborn.

Some bondholders, led by investor Carl Icahn, are concerned that the company’s value is eroding in bankruptcy court, which has made it more difficult to take the steps necessary to compete with Netflix and other rivals that aren’t hobbled by the cost of running retail storefront operations.

According to business news reports, that is what’s behind the drive to try to sell the company now. Blockbuster’s holiday sales were lackluster at best, and the cost estimates for effecting a successful turnaround are going ever higher. The bondholders have essentially lost their appetite for plowing more money into the enterprise.

So who’s actually going to be interested in buying Blockbuster? That’s a very interesting question, because the company’s business model and financial situation don’t look like strong ingredients for business success. So if a buyer emerges, it may be from among the ranks of those who already have a financial stake in the business – like Mr. Icahn.

Will we look back on this week a few years from now and say that it was the beginning of a turnaround – or the final nails in the coffin? If you’re a betting person – or an investor – where would you place your money?

The Latest Read on e-Readers

The e-reader phenomenon continues to grow. In fact, sales of e-readers have turned out to be one of the brightest spots in the consumer electronics segment during the 2009 holiday season.

And 2010 is starting out with a bevy of new e-reader product introductions from a half-dozen different manufacturers.

“Way back” in August 2008, research firm iSupply released projections for e-readers that anticipated 3.5 million units to be sold worldwide in 2009. That was up dramatically from 1.1 million units sold in 2008 – almost all of them Kindle or Sony e-readers.

Those projections were considered highly optimistic by some observers. But now that the year has passed, it’s looking like the prediction was on the low side; iSupply’s revised sales figures for 2009 are closer to 5 million units. And Forrester Research estimates that 2009 e-reader sales in the U.S. were very strong, with ~30% of the sales occurring during the holiday season in November and December.

In fact, Amazon has reported that its Kindle e-reader emerged as the most-gifted item ever from its web site.

Now, hard on the heals of the recent Nook e-reader introduction by Barnes & Noble comes news from the International Consumer Electronics Show (CES) of a host of new entrants in the e-reader game. Ranging in price from under $200 to nearly $800, each new entrant is aimed at meeting the needs of different target groups – from those wanting business news to people who wish to read full-length books. Not surprisingly, many of the new enhancements are centered on making the e-reader experience as “easy on the eyes” as possible.

Among the more interesting introductions at CES:

Que (made by Plastic Logic), which incorporates advanced polymer technology to create a shatter-proof screen.

Skiff (Hearst Corporation), which offers a store for digital newspaper/magazine subscriptions.

eDGe (from Entourage Systems), which provides two screens that fold up like a book. (One offers color display and the other a b/w display for newspaper reading.)

Not to be left on the sidelines, the granddaddy in this business – Amazon – is introducing an international version of the Kindle DX. Amazon now offers both larger- and smaller-sized Kindle units in prices ranging from $250 to $500.

With all of these new options in e-readers, what’s in store for 2010 volume? Observers are now predicting that unit sales will be twice as many as in 2009 … which certainly qualifies e-readers as the latest “rage” in the consumer electronics world.

e-Books on the March

The Nook e-Reader, released by Barnes & Noble just in time for the holiday shopping season.
The Nook e-Reader, released by Barnes & Noble just in time for the holiday shopping season.
The e-book revolution continues apace. In the past week, Barnes & Noble announced the introduction of its own electronic book reader – the Nook – to compete against Amazon’s Kindle and Sony’s e-reader. Amazon promptly responded by lowering the price of the Kindle to match Barnes & Nobles’ Nook e-reader price. No doubt, both companies are looking to the holiday season, hoping their products will turn out to be among the few that are “stars” in what will otherwise be a season of tepid merchandise sales.

And now Google has gotten into the fray as well. It has announced new details on the pending launch of its e-bookstore, Google Editions. This is an online bookstore that will deliver digital books to any digital device such as e-readers, laptops and cellphones. Google plans to offer up to 600,000 book titles during the first half of 2010 alone, nearly matching the number of volumes that Barnes & Nobles will be offering with the Nook.

True to form, Google seems bent on taking an idea that is gained acceptance in the market – and then scrambling the deck to create a new set of game rules. In this case, it’s attempting an end-run around Amazon’s and Barnes & Nobles’ proprietary e-reader devices by offering the ability to download books to any digital device.

Google’s hope is that e-readers will eventually lose their luster once books are available for download to any device. But Forrester Research is estimating that ~3 million e-readers will be sold in 2009 — ~1 million higher than its earlier estimate. And some observers think that Google may be underestimating the importance and value of the proprietary e-readers; they note that Kindle users have been highly satisfied with the product and how it performs. (Besides, the audience for reading entire books on a cellphone device is probably pretty limited!)

In Google’s program, publishers will set the price of books, while Google will earn over half of the profits and share them with its retail partners. But there is an aspect of Google Editions that might turn out to be a significant “negative” for at least some users. Google is toying with the idea of including AdWords or AdSense advertising in its book offerings. Cramming a bunch of advertising surrounding the book contents could be a big turnoff. Even having blue-highlighted links in the text — while normal and expected when reading an online article such as this NonesNotes blog post – could be a major distraction when plowing through the contents of an entire book volume.

Regardless of how things play out, it’s clear that the ~$150 million e-book segment is going nowhere but up in the coming years, and it will be interesting to see how each of the key industry players ends up faring in the coming months. (And the story line gets even juicier with reports that Apple is also nosing around this market and may have something important to unveil before long.)