In evaluating the growth potential of Barnes & Noble (NYSE:BKS) in the ebook space, we should clearly differentiate between selling devices (e-readers) to selling titles (ebooks). The Nook devices cannot beat the Kindle e-readers, but e-readers overall are less important. E-reader ownership has declined by 40% since 2014 (The Demographics of Device Ownership in the US, Pew Research).
Today 77% of US citizens own a smartphone, and 45% own a tablet device (The Demographics of Device Ownership). The screen size and general readability on these devices has improved, and reading books on smartphones or tablets is common practice.
So to evaluate the potential of BKS in the ebook space, it is essential to:
1. Set aside the device sales, which all have practically given up on.
2. Look independently at the potential of ebook sales.
The BKS brand is extremely strong in print books, and marginal in the ebook space. Below is an analysis of BKS’s share of ebook unit sales (February 2017 Big, Bad, Wide & International Report: covering Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), BKS, and Kobo ebook sales in the US, UK, Canada, Australia, and New Zealand). BKS has about 4% of the US market, and is practically non-existent in other English-speaking countries.
The current ebook business model is essentially the same as the print book model, with some slight alterations. People have to purchase the book to gain access to it. The book market has not yet experienced the deep digital disruption we see in music, video, taxis, or other.
If BKS would be able to identify and promote a different, more appealing business model, even only for parts of its catalog, it could easily leverage its brand and its connections with publishers (who are all very unhappy with the Amazon dominance) and greatly expand its ebook market share.
One such model could be the ‘pay-per-read’ model, where readers can download any book free of charge, and pay only for the portions they actively read. This model, already used in US public libraries is a highly desirable solution for readers (better value proposition, absolute freedom to follow their interests) and for publishers (utilize the full value of their catalog, bring life to the long tail). It also enhances distribution, and enables flat, person-to-person ebook sharing. Sharing a book becomes as easy as sharing a photo.
The original growth of ebooks was due to novelty, comfort, and immediacy, and these advantages have been fully exploited by now. Little has changed in terms of value proposition or distribution model. The next level of growth would be based on improvements in value, recommendation (analytics) and distribution. The ‘pay-per-read’ model enables all these improvements.
Given the strength of its brand, its existing customers, and relations with publishers, if BKS would bring a disruptive solution to the ebook market, it should be able to triple its market share, to at least 10%-15%, which would increase its annual revenues by $200-$300 million.