barnes and noble

We call it obsolescence, sister.

We don’t shill for corporate products here on Control Your Cash, excluding the wonderful sponsors whose ads you can scroll down and see. (That’s VRBO.com, everyone! For your next vacation, rent someone’s home and eliminate the middleman!)

And Amazon. Our relationship with the Kindle is equivalent to Peter King’s with Brett Favre, except Favre might return some of King’s calls. As far as we’re concerned, being able to carry your entire library around with you in a device that weighs a few ounces is more impressive than anything Pioneer 11 did or might be doing.

Sometime last year, your humble blogger and his smartphone were perusing the stacks at a Barnes & Noble when a certain book caught our attention. Well, not only can you can get Wi-Fi inside Barnes & Noble, the company brags about it. Which means you can access Amazon.com, which means you can patronize a bookstore’s competitor while in that bookstore, and start reading the competitor’s books right away. Barnes & Noble even gives you a chair if you want it. It’s like they’re trying to destroy shareholder value.

And that’s Barnes & Noble, the corporate behemoth that smaller bookstores used to regard as the epitome of evil. What about those mom-and-pop operations themselves?

Pulitzer laureate Richard Russo spent 12 years in college and somehow never learned a thing about economics. Earlier this month, he bitched in the New York Times about how Amazon itself is now encouraging its customers to do what we figured out (and anyone else could) all by ourselves:

Amazon was encouraging customers to go into brick-and-mortar bookstores on Saturday, and use its price-check app (which allows shoppers in physical stores to see, by scanning a bar code, if they can get a better price online) to earn a 5 percent credit on Amazon purchases.
…
I wondered what my writer friends made of all this, so I dashed off an e-mail to Scott Turow, the president of the Authors Guild, and cc’ed Stephen King, Dennis Lehane, Andre Dubus III, Anita Shreve, Tom Perrotta and Ann Patchett.

(pause)

(Sorry, we were busy returning e-mails from our good friends Queen Elizabeth, President Obama, Paul McCartney, Tom Cruise, LeBron James, Oprah, and Angelina Jolie. Where were we?)

Assuming Russo is telling the truth, Scott Turow has no understanding of law nor of modern life. Turow responded:

… it’s worth wondering whether it’s lawful for Amazon to encourage people to enter a store for the purpose of gathering pricing information for Amazon and buying from the Internet giant

Not sure what statute Amazon would be violating there, unless they’re encouraging people to enter the stores and render the merchandise unsellable. But the brick-and-mortar bookstores are already doing that themselves, by pricing it too high. Russo continues, in his long-winded and quixotic manner:

A few miles down the road from where I live on the coast of Maine, a talented young bookseller named Lacy Simons recently opened a small bookshop called Hello Hello, and in her blog she wrote eloquently about her relationship to “everyone who comes in my store. If you let me, I’ll get to know you through your reading life and strive to find books that resonate with you. Amazon asks you to take advantage of my knowledge & my education (which I’m still paying for) and treat the space I rent, the heat & light I pay for, the insurance policies I need to be here, the sales tax I gather for the state, the gathering place I offer, the books and book culture I believe in so much that I’ve wagered everything on it” as if it were “a showroom for goods you can just get more cheaply through them.”

Opening a small bookshop in 2011 is like opening a Studebaker dealership in 1966. Or more aptly, a Borders store in 2011. Although we admire Ms. Simons for choosing a Gary dell’ Abate catchphrase for the name of her store.

Ms. Simons’s diatribe is why finance and economics courses should be required at every level of education. Hers is the same illogic echoed by so many of the Occupy Wall Street protestors: I invested in something (an impractical education, a business that can’t turn a profit), so regardless of that investment’s expected real-world return, if any, I demand a payout. Ms. Simons went to college (and financed her education, then took on still more debt before paying it off), and somehow Jeff Bezos and his silly computer engineering degree are “tak(ing) advantage” of her.

No successful businesswoman blames others for her own failure. Adapting to the reality of the market might not be fun, but it’s not like you have a choice in the matter. It’s like when Texas Instruments and their handheld calculators ran all the abacus makers out of business in the 1960s. Those people spent years learning how to put beads on strings in a wooden box, only to have TI, Casio and Sanyo “take advantage” of them. Didn’t the abacus makers have factories? And power bills? And insurance policies? So, so unfair.

As authors ourselves, we should mention that Amazon has been far friendlier to us than any retailer has ever been. We set up an account on Amazon, independent of our publisher, and now take home 70% of every book you buy. Meanwhile, trying to get our book on the shelves at local sellers was a gigantic pain. To do so you have to drive across town, hope you catch the appropriate store employee on the right day, and then, if she’s feeling particularly generous that day, she might offer to take 2 or 3 copies of your book and see if anyone buys them. Then, to find out if anyone does, you have to drive back and see for yourself (or call and waste some poor employee’s time.)

From the consumer’s perspective (and that’s a phrase many independent shopkeepers would have trouble understanding), which is easier:

a) Driving to a local store, stumbling across Control Your Cash: Making Money Make Sense by accident, thumbing through it and then buying it, or

b) Entering “personal finance” on Amazon.com, reading the reviews, then reading a sample, then having it wirelessly delivered in the time it takes you to wait in line at a retail store? For less than the retail store can sell it for? While giving the creator of the work a bigger cut than you give the middleman, if that’s the kind of thing that’s important to you?

It seems we’ve figured out why independent bookstores are doomed. Not just because their business model is obsolete, but the people running them are clueless.

**This article is featured in the Carnival of Personal Finance #342: Happy New Year Edition**

: “Folks, come on in. Bring your groceries. Sit in these plush chairs. For hours on end if you want. Sample the merchandise, but you don’t have to buy anything.” Now that’s a business plan!

In the past we’ve looked at stocks whose prices tailspin for no structurally valid reasons. Examples: Toyota, which sank 22% in the weeks after an impressionable woman with a gift for fantasy testified before Congress that her Lexus SUV’s accelerator pedal fell under the control of an incubus. Or British Petroleum, which made some ham-fisted attempts at public relations damage control after a tragic accident, losing 55% of its market value in 2 months (never mind that people were less concerned about the immediate deaths of 11 workers than about the presence of an oil slick small enough to fit in two supertankers with plenty of room to spare.)

BP’s stock has risen 60% since then, while Toyota’s has regained the value it lost and then some. Both companies create useful products in high demand. Japanese engineering and the stuff that makes it run will become obsolete, but not soon. A temporary gut punch to either company’s stock price shouldn’t make a difference to any long-term prognosis. Check that: that gut punch provides a great opportunity for anyone willing to buy an unnecessarily undervalued stock.

But what if technological progress were to fundamentally change either company’s business model? Or their products’ entire market itself?

Look at book retail. In barely more than a decade, we’ve gone to two titans dominating the market, to watching those same titans fight to stay viable. At their mid-oughts zenith, between them Borders and Barnes & Noble (or for readers who speak in the Central Michigan vernacular, “Barnes & Nobles”) were selling the vast majority of new books in the United States.

Among physical stores, that is. You want to squeeze the tomatoes or test drive the car before committing to buy. But you don’t need to do anything similar with a book. Why would you, when Amazon lets you read excerpts online and beats practically everyone on price?

Of course Borders and Barnes & Noble have websites, that’s not the point. In fact, as recently as 2 years ago Amazon served as Borders’ online presence. 90% of Barnes & Noble’s revenue still originates in its stores, and those in-store sales continue to decline quarter after quarter. While stand-alone music retailers have vanished and Best Buy’s CD* displays been reduced to a few square feet of rack space, Borders mystifyingly continues to devote a dedicated section of the store to music (and still maintains the official name “Borders Books and Music”.)

Two years ago, when its stock was trading at 35¢ and in danger of being delisted, Borders first publicly discussed a merger. Since then, the company has borrowed an amount equal to almost half its market value from its majority shareholder (at a borderline usurious 12.5% rate.) That market value is $86 million, which will get you just under 5 years of Cliff Lee.

Meanwhile, Barnes & Noble’s stock has lost almost half its value in the past 6 months. In December that Borders majority shareholder offered a 20% premium on all outstanding Barnes & Noble shares in an attempt to finally bring the merger to life. Each company’s shares enjoyed a brief hiccup, but their prices have already fallen back to Earth. Not counting that mid-2008 unpleasantness, Barnes & Noble is trading at close to an all-time nadir in real dollars.

Say this merger idea works. No one disputes that it’ll result in fewer stores, which it will for obvious reasons. (Fortunately for both companies, bookstore clerks aren’t unionized.) A lot of the newly redundant real estate remains valuable, but turning it into an asset on the balance sheet won’t do anything to improve long-term cash flow.

More importantly, it’s not as if tens of millions of satisfied Amazon customers are going to say, “You know what? This buying books online and usually getting free shipping jazz is getting tiresome. I’m cancelling my account. It’s back to 20th-century bookstore browsing for me.”

Sometimes, undervalued stocks aren’t really undervalued. They’re just not worth that much.

*CDs, or compact discs, were these pieces of polycarbonate plastic that had music on them. Popular in the 1990s.

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