When Being Good Isn’t Good Enough

The New York Times carried an ominous story this week on the souring outlook for  Barnes & Noble’s Nook business, portending perhaps its exit from the e-reader and tablet markets.  The Nook’s decline comes despite its technical competence and the recent infusion of $600 million of capital by Microsoft.

As the Times notes, “going into the 2012 Christmas season, the Nook HD, Barnes & Noble’s entrant into the 7-inch and 9-inch tablet market, was winning rave reviews from technology critics who praised its high-quality screen. Editors at CNET called it “a fantastic tablet value” and David Pogue in The New York Times told readers choosing between the Nook HD and Kindle Fire that the Nook “is the one to get.”

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Unfortunately, high marks from pundits didn’t translate into sales.  Nook sales stalled over the Christmas season, losses mounted and profit and revenue guidance has been reduced.
What happened?
The Times article shares this explanation: “In many ways it is a great product,” Sarah Rotman Epps, a senior analyst at Forrester, said of the Nook tablet. “It was a failure of brand, not product. The Barnes & Noble brand is just very small.”
I beg to differ.  The Nook’s problems go far beyond B&N’s brand strength. There are three fundamental reasons for Nook’s failure that have implications for any company (and eventually this means every company) facing technology disruption:

1. Demise of single-purpose devices 
   The Nook was initially developed as an e-reader, i.e. a single-purpose device.  So too were digital cameras, wristwatches, travel alarm clocks, miniature flashlights, GPS navigators and Apple’s iPod.  The demand for each of these products has been decimated by all-encompassing smartphones and tablets, which include good-enough or better performing apps, often for free.
   
   For example, if you’re Garmin or Tom Tom trying to sell a standalone GPS navigator for $120 against a free Google Maps app on an Android or iOS smartphone, good luck to you!  Each of these product categories has suffered steep sales declines in the face of multi-function mobile devices.While purists may argue that purpose-built e-ink e-readers like the Nook Simple Touch (pictured above) has better readability in bright sunlight and longer battery life than tablets, I sure wouldn’t want to bet my business on these advantages against the relentless improvements (lighter, brighter, faster cheaper) in mobile devices from industry leaders.
   Undoubtedly this is why Barnes & Noble bet a lot of their own and Microsoft’s money to develop their own tablet devices.  But if oddsmakers were handicapping the tablet race between Barnes & Noble, Apple, Samsung, Google, Amazon and Microsoft, I think it’s fair to say that a bet on B&N would be a prohibitive longshot.  When it comes to dedicated e-readers, the market may be big enough to profitably support one major supplier, but that will be Amazon, not B&N.

     2.  Disruption redux
More broadly the Nook story is yet another example of how disruptive technologies transform value chains, destroying incumbents who no longer create value in the new industry order.  With the advent of e-reading devices and digital publishing, book retailers and publishers are severely threatened. We’ve been to this dance before in the music industry, where incumbent retail leaders were essentially wiped out.

For a variety of reasons, bookstores (if not the Nook) are likely to survive for quite some time, but only at a fraction of their former scale.Was B&N’s decline inevitable, given the transition from print to digital books?  One could ask the same question of Amazon, whose dominance of book sales on amazon.com was equally threatened by e-reader technology.  But to Jeff Bezos’ credit, Amazon chose to disrupt itself by aggressively launching the Kindle business, which quickly established itself as the dominant digital book platform.  By the time B&N responded with its own Nook devices and e-bookstore, it was too late.The willingness to disrupt one’s own core business before someone else does it to you is a hallmark of inspired leadership.
Bezos rules.

3.    Stuff Happens!  What’s up with Microsoft?
As a play on the well known adage, “Disruption Also Happens”!  In every industry, the question isn’t whether but only when.  The only way to  survive and prosper through successive waves of disruption is to be the disruptor, not the disruptee!One would think Microsoft would have learned this lesson by now.  Over the past decade, Microsoft has managed to miss five of the most transformative disruptions in the high tech sector:

• Internet Search
• Mobile Devices/Apps Ecosystems
• Social Networking
• Cloud-based SAS
• TabletsTo add insult to injury, Microsoft has tried to cover their innovation lapses with a series of über acquisitions and/or investments (>$500 million) in companies who themselves have lost the disruption race and/or have failed establish a viable business model.

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• Cases in point include:
  
• Yahoo ($44.6 billion failed acquisition bid; ~2X Yahoo’s current market cap)
• Nokia (>$1 billion invested in partnership deal)
• Nook ($600 million invested for equity stake in Nook spinoff)
• aQuantive ($6.3 billion digital marketing acquisition, since fully written off)
• Skype ($8.5 billion acquisition)
• Yammer ($1.2 billion Social Networking acquisition)
• Dell (>$1 billion investment offer pending for LBO deal)

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Bottom line: Serial innovation is the only proven antidote to the accelerating pace of disruptive technologies.  It certainly looks like Barnes & Noble and Microsoft have not been up to the task.