The End: Barnes & Noble in Silicon Valley

As the chief executive of Barnes & Noble from 2010 to 2013, William Lynch might have had one of the most difficult jobs in the retail business. He made it harder still by running a large chain of bookstores as though it were a tech startup. Burning through about a billion dollars, the company built its own e-reading devices, which were well-received, and then its own tablet computers, which weren’t. Barnes & Noble sold so few tablets over the holidays last year that it actually lost money during the one time retailers can count on profits. “We are not going to continue doing what we’re doing,” Lynch said in February.

By then it was too late. In June, Lynch made another grim announcement: The Nook business had an operating loss of $475 million for the fiscal year ended in April, more than it lost in the previous 12 months. Two weeks later he was out of a job. Lynch’s resignation on July 8 was effective immediately. Leonard Riggio, the company’s chairman and largest shareholder, who’d plotted with Lynch to create a digital future for Barnes & Noble, issued a 30-word statement thanking him. Most book blurbs are longer.

With that, the 43-year-old Lynch became the latest casualty in Barnes & Noble’s battle against two of the most creative, disciplined, and well-funded companies around:Amazon.com and Apple. He was a victim, too, of his own ambition and enthusiasm. “He is exceptionally smart and optimistic to a fault. He drank too much digital Kool-Aid,” says Michael Norris, a senior analyst at Simba Information. Many people at Barnes & Noble worried about Amazon killing the bookstore; it sometimes seemed as if Lynch wanted to do it himself. He was a Silicon Valley dreamer in charge of a bookstore chain. As he said on Bloomberg TV in late 2012, “I don’t really read physical books that much anymore.”

Barnes & Noble is a $6.8 billion company with 675 carefully selected locations in every state in the country. It also operates 686 college bookstores, which with the e-reader operations make up the company’s Nook Media unit. Sales at its regular stores declined almost 6 percent in the company’s 2013 fiscal year, to $4.6 billion. But because their margins are getting higher and their expenses lower, the bookstores still make money: Ninety-five percent are profitable. Lynch may not have been reading real books, but Barnes & Noble’s customers still do.

The company hasn’t announced its plans yet, but it will probably sell the e-reader business or shut it down. Barnes & Noble’s Nook misadventure may look like one of those inexplicable unforced errors businesses make from time to time, like New Coke or the Edsel. But it’s hard to blame Lynch for trying to transform the company. The digital revolution is changing the dynamics of the business. The company had to respond, and it still does. The problem was that Lynch tried to transform the wrong thing.

 

 

Barnes & Noble has a history of ill-timed technological decisions. In the 1990s it was focused on beating Borders and didn’t set up its website until 1997, a full two years after Amazon.com went live. It introduced a primitive e-reader too early, in 2001 (on Sept. 11, to make things worse). After Amazon introduced the Kindle in 2007, Barnes & Noble needed someone to take control of its destiny and hired Lynch to do just that.

Lynch, who grew up in Houston, always had some Texas swagger. He had an MBA from the Columbia School of Business and a background in marketing. In 2000 he was the general manager of e-commerce at Palm, the now-defunct smartphone manufacturer; he co-founded Gifts.com four years later; then he did a quick turn atHSN’s website. Lynch had a real sense of grandeur about his role there and his future beyond it, says a former colleague who asked to remain anonymous. No one expected him to stay long. (Lynch did not respond to requests to comment for this article. Riggio also declined to comment.)

When Lynch joined Barnes & Noble as head of its online business in early 2009, the Nook project was already under way. Back then it was code-named Bravo. Company executives had also brought on Robert Brunner, an industrial designer who’d worked at Apple and helped create the Amazon Kindle. They hired software engineers and hardware designers and set them up in a former bakery in downtown Palo Alto.

In October 2009, Lynch introduced the e-reader. “This is Nook,” he said from the stage at Pier 60 in Manhattan as he held up the device. The e-reader’s welcome screen featured an introduction by humorist Dave Barry: “Congratulations on your new Nook! We’re sure it will give you many years of trouble-free enjoyment until next week, when we come out with a newer version.”

The Nook looked good, worked well, and sold better than Barnes & Noble expected. “There was certainly a period when Nook was a real device leader,” says Mike Shatzkin, head of Idea Logical, a consulting firm. “But it was brief.” Three months after Lynch introduced the Nook to an audience for the first time, Steve Jobs held up the iPad.

Lynch was appointed chief executive officer of Barnes & Noble in March 2010, replacing Steve Riggio, Len’s younger brother. The decision was a reward to Lynch and a pledge to speed up the transformation of the bookseller. It was also a way to placate Ron Burkle and other investors who, accusing the Riggios of running the company as if they owned it, had threatened a hostile takeover. “Our stores are very much the piazzas [we] always imagined in the past,” Len Riggio said when announcing the changes. “Now we want to be equally committed to the other parts of our business.”

The early success of the Nook emboldened Lynch, and he made the biggest, most expensive decision of his career: to compete with the iPad. Riggio wholeheartedly bought into the idea. He turned over more of the stores’ profits to Lynch and more of the stores’ space to the Nook. “We will try to create the same type of excitement one sees in the Apple stores,” Riggio said in the summer of 2010. Lynch called the in-store Nook displays the “shrine” in a New Yorkmagazine interview. Most customers bought their Nooks at those shrines, though Walmart, Target, and Best Buy also carried them.

Lynch unveiled his first tablet computer, the Nook Color, in October of that year. “We’re playing offense with this device,” he said on Bloomberg TV. The device was smaller, lighter, and less expensive than the iPad. It was also less powerful and less entertaining—no app store, no camera. Nor did Barnes & Noble have the partners, suppliers, financial resources, or expertise of Apple or Amazon.

When Riggio helped introduce another version of the tablet in the spring of 2011, he said, “We’re all in, in terms of effort and a huge investment in capital and people.” Asked about the competition, he replied: “It may seem daunting to you, but not to me. It would be like saying to a retailer, how can you compete with Wal-Mart? Or to a media company, how can you compete with Google?”

 

 

By 2011, Barnes & Noble had won about 25 percent of the then $2 billion e-book market. Lynch was spending several days every other week in Silicon Valley, where he built up an operation of 300 highly paid engineers and designers. “The company became kind of schizophrenic,” says Jack Perry, who runs the publishing consulting firm 38Enso and who has been watching the bookseller closely. “The people in New York didn’t know what was going on in Silicon Valley, and the people in Silicon Valley didn’t care what was going on in New York.”

Lynch, as head of the entire company, was nevertheless one of the Silicon Valley people. He’d never worked in traditional retailing and didn’t pay enough attention to how he could use the bookstores to enhance his digital strategy—and vice versa. “He did not create actual reasons for Nook consumers to visit Barnes & Noble stores,” says Simba Information’s Norris. “When people go digital, they don’t go cold turkey. They still buy print.”

As Lynch pushed his Silicon Valley group to develop multimedia features, some there thought these efforts were misguided. Two former employees, who left the company recently and declined to be named because they didn’t want to speak publicly about a former employer, described them as an unwelcome distraction. One of the former employees cites the Nook’s family profiles feature, which allows different users to maintain separate media libraries on a single device. Lynch bragged about it, competitors quickly copied it—and Nook’s advantage was lost. Another big distraction, one says, emerged after Microsoft invested $300 million in 2012 in what became known as Nook Media. Part of the deal required the engineers to create an app for the new Windows 8.

Lynch became less willing to countenance disagreements, which squelched creativity and pushed people to leave, according to the former employees. Brunner, the industrial designer, still works as a consultant to Nook Media and thinks highly of Lynch. He describes the former CEO as decisive, saying, “He would listen, but he was one of those leaders who viewed his job as making decisions. It was not a consensus approach. But it wasn’t Jobs’s maniacal autocracy either.”

As the holiday shopping season of 2012 drew near, and Lynch was talking up his two new tablets and their multimedia capabilities, Apple introduced the iPad mini. Amazon released an updated Kindle Fire, and Google unveiled a 7-inch tablet. In a testament to just how persuasive Lynch could be, on Dec. 28 the publishing company Pearson announced an investment of $89.5 million in Nook Media, giving it a 5 percent stake in a business that was about to post an operating loss of $156 million in one quarter. It could have been worse: At least the other part of Nook Media, Barnes & Noble’s college bookstores, was profitable. Pearson didn’t respond to a request for comment.

Then Riggio made an announcement of his own. He expressed interest in buying the retail division, and not, pointedly, Nook Media. Three days later, on Feb. 28, everyone knew one reason: Barnes & Noble had actually lost $6 million over the three winter months because Nook sales had dropped 26 percent from the year before. “The larger technology brands have more resonance in that multifunction tablet market than we do,” said Lynch. “And so, we obviously have to adjust and change.”

What followed was four months of mixed signals. In early March, Lynch signed a two-year contract that seemed to deny reality. It gave Barnes & Noble the right to make him the head of Nook Media should it be split from the retail business, and it entitled him to a $1.5 million retention bonus. The contract also stated that he’d received $1.8 million for attracting Microsoft and Pearson as investors. In May, Lynch found an ally in Google. He struck a deal to install the Google Play app store, Gmail, and the Chrome Web browser on new devices. Although the Nook was built with Google’s Android operating system, users hadn’t been able to access any Google apps. Lynch said Nook was now one of the most “versatile” tablets in the market.

Barnes & Noble presented its financial results for fiscal 2013 six weeks later. Overall sales declined 4.1 percent, to $6.8 billion, and it lost $155 million. The traditional bookstore business had a profit of $374 million, a 16 percent increase from the previous fiscal year, even though sales declined 5.9 percent, to $4.6 billion. And of course there was the Nook business’s operating loss of $475 million on sales of $776.2 million.

If Nook Media had really been a tech company, maybe executives and investors could have tolerated those losses. But it isn’t. It’s an expensive accessory for a shrinking bookstore chain. Now it was time to “de-risk the Nook business plan,” Lynch said, by partnering with a device manufacturer on future tablets. He didn’t have any partners to name, however.

And then he was gone. “It wasn’t a power struggle between William Lynch and Len Riggio. It was an economic decision,” says David Strasser, an analyst with Janney Montgomery Scott. “Lynch was willing to stomach greater losses for a greater period of time. That’s the tech mentality, but that’s not the way Len Riggio does business.” 

 

Riggio hasn’t named a new CEO, nor has he elaborated on his plans to buy the bookstores and website. No one at the company has commented on whether Lynch’s departure might hasten a sale of Nook Media. But Riggio did put the company’s chief financial officer, Michael Huseby, a man with experience spinning off divisions, in charge of Nook Media. Microsoft owns a 17 percent stake after its initial investment and the promise of an additional $305 million over the next five years. In May, TechCrunch reported that the software company was considering a $1 billion bid for Nook Media. Microsoft declined to comment.

“Barnes & Noble cannot ultimately escape the fate of Blockbuster and Virgin [Megastore]. But they have to make the slide into oblivion more gradual,” says Idea Logical’s Shatzkin. “Does Barnes & Noble have 3 years or 10 years? I don’t know. But it doesn’t have 20 years, that’s for sure. They have to manage their disappearance or turn into something completely different.”

Barnes & Noble may be keeping quiet about its plans, but plenty of others have suggestions. “Their business should be selling content,” says Rick Schottenfeld, an investor who’s been critical of how much the company spent on the Nook. “If they’re going to sell e-readers, they should be commoditized, not cutting-edge. Barnes & Noble should give them away: Buy one for $50 and get a $50 credit.” The company could place electronic codes on books so people can swipe and buy the digital version in stores or friends’ homes, says Norris. Peter Olson, the former chief executive of Random House, suggests that when a Nook user buys a print book as a gift, the digital version could be half-price. “Maybe Amazon should take over the top locations as showrooms,” he says.

The company Lynch leaves behind is perhaps wiser and certainly poorer. The bookselling industry is still in flux, sometimes defying expectations. E-book sales make up about 20 percent of the total $15 billion market. Most people assumed e-books would quickly overtake physical books. Last year, though, their gains slowed. Sales rose 44 percent, but they had more than doubled the previous year, according to the Association of American Publishers. People still prefer to read serious books, and kids’ books, too, in print.

There’s been another unanticipated shift: When people buy tablets they don’t necessarily use them to read. Simba reports that half of iPad owners and 25 percent of Kindle Fire owners didn’t read a single e-book last year. “E-books sound really cool if you’re a publisher in a room with smart tech people,” Norris says. “Everyone just assumed that when people had tablets, they’ll become readers. That’s nonsense.”

Whatever Riggio decides to do with the business he built, he could do worse than remember why people still go to his stores. People enjoy being around books, holding them, turning their pages. As Barnes & Noble’s new head of Nook Media says, richer minds, richer pockets.

BusinessWeek.com