B&N, Blockbuster on same deathbed?

Investors are digging the book retailer's grave, comparing it with the failing video-rental chain.

By TheStreet Staff Aug 12, 2010 11:16AM

TheStreetBy Jeanine Poggi, TheStreet


Is Barnes & Noble (BKS) the next Blockbuster?


That's the question being asked after the largest book retailer announced that it's putting itself up for sale. It's easy to see why investors fear Barnes & Noble will imitate the doomed fate of Blockbuster. Both of their paths to dominance have become iconic stories of business in the 1990s.

While Barnes & Noble dates all the way back to 1873, the company didn't roll out its superstores until the early 1990s. In 1989, Barnes & Noble had 23 such stores, and by 1992 the number had more than quadrupled to 105. In just one day in August 1992, the company opened five superstores and three months later launched three more.

Around the same time, Blockbuster was rolling out a new store each day.


Along with that monstrous growth came scorn from people who feared the two juggernauts would kill mom-and-pop shops across America. (For the most part, they did). But such growth is nearly impossible to sustain, especially in an evolving retail landscape.

By the end of the '90s the manner in which Americans consumed movies had begun to shift. But instead of leading the revolution, Blockbuster chased its tail. Netflix (NFLX) rolled out its DVD-by-mail format in 1999. The technology was iffy, and acceptance of the new medium was gradual. It wasn't until 2004 that Blockbuster introduced its own online DVD rental service.


Then, in 2004, Coinstar (CSTR) introduced DVD kiosks. It took Blockbuster half a decade to adopt a similar program, partnering with NCR (NCR) in 2009 and installing Blockbuster Express kiosks.


Blockbuster once again missed the boat when Netflix started streaming movies in 2008.


As a result, Blockbuster has become increasingly irrelevant and now finds itself suffocating under $1 billion in debt. The company is due to make its next payment Friday, and if that fails to satisfy creditors, it could be forced to file for bankruptcy.


Blockbuster hasn't been the only casualty of the digital revolution, with Movie Gallery liquidating its assets this spring. And now it appears that Barnes & Noble could be following a similar trajectory.


Like the movie industry, the book sector has been hit by a barrage of game-changing technology, namely the e-reader.


Amazon (AMZN) pioneered electronic reading when it launched its Kindle in 2007. It took Barnes & Noble two years to roll out its own e-bookstore, and it didn't unveil its Nook e-reader until October 2009.


Now Barnes & Noble is struggling to catch up. According to Codex Group, a consultant to the publishing industry, Amazon had sold 2 million Kindles as of mid-June, compared with 600,000 Nooks. Amazon said last month that Kindle sales tripled in the second quarter and that e-book sales outnumbered hardcover books.


For investors, the similarities between Barnes & Noble and Blockbuster have been enough to drive the stock down 21% this year. But before you write Barnes & Noble's obituary, consider the ways the bookseller and the movie renter differ.


Barnes & Noble may have already taken a step in the right direction by considering the sale of the company. If taken private, the company could buy the opportunity to reassess its store base, close underperforming locations and beef up its e-reader to better compete with those of Amazon and Apple (AAPL).


Blockbuster's internal operations have also been more pressured than Barnes & Noble's, ever since the movie renter broke off from Viacom (VIA) in 2004. Blockbuster managed to shed its last letter of credit with Viacom only at the beginning of the year. Barnes & Noble is not being weighed down by such issues.


While the book industry is viewed by some observers as a mirror image of the movie industry, that mirror is more of a fun-house mirror, with a reflection that's askew. For one thing, the speed at which movie consumers migrated to movie downloads and streaming content appears to be faster than readers' acceptance of electronic books.


"People are not going to stop reading. Illustrated books do not lend themselves to digital adoption. Books will continue to be bought for gifts, and none of the technologically oriented e-book competitors has Barnes & Noble's store base to enable customer interaction," said Margaret A. Gilliam, the president of the research firm bearing her name. "We do not expect the book business to go the way of the recorded music and DVD businesses."


Morningstar (MORN) analyst Peter Wahlstrom predicts that consumers won't stop purchasing physical books in the near future, and he doesn't expect the 20% to 30% drop-off in the next five years that others are forecasting.

"The physical bookselling business is very competitive, but we don't foresee the dramatic closing of stores at Barnes & Noble," Wahlstrom says. "The stores are a cash-flow cow, and Barnes & Noble can use the cash from the stores to invest in digital."


"Investors gravitated toward the digital aspect of the book industry because that is the buzz right now," Wahlstrom continues. "But the underlying business still has a long tail."


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