Living on Amazon's Planet
Is there any business in any sector that is not threatened by Amazon? Walmart cannot seem to build a functional e-commerce business. Best Buy is worried about "showrooming"--about customers examining electronic products at Best Buy and then going home and ordering them from Amazon. In the Seattle area, Amazon is now experimenting with the delivery of fresh produce. And Amazon is also threatening to tech businesses. For example, Amazon Web Services is now competing with Rackspace and Microsoft for ownership of the fundamental software infrastructure of the web. And of course Amazon is in the process of taking over the book publishing industry. Amazon publishes books and also enables independent authors to publish themselves. What makes Amazon particularly dangerous is that it exerts a downward pressure on prices and destroys the margins of the industries it enters. As a venture capitalist, I also have another complaint: for a tech giant with deep pockets, Amazon acquires too few start-ups, although they did buy Zappos for $850 million in 2009 and Kiva Systems for $775 million in 2012. Amazon is generally not rewarding innovation outside of its own walls and does not play well with other companies. Today's partners could be tomorrow's lunch. From the standpoint of almost any corporation, Amazon is a very large and truculent crocodile that may surface unexpectedly at any moment in uncomfortable proximity.
Strangely, though, Amazon has not yet disrupted educational publishing or educational technology. Amazon just entered the textbook rental business, which is not good news for Chegg or Rafter, but Amazon has not yet gone directly after Pearson or Cengage or McGraw Hill Education or Houghton Mifflin Harcourt. Amazon does not really publish its own textbooks, and Amazon has not to date focused on selling textbooks to K-12 school districts. This may be because Amazon has traditionally focused on direct-to-consumer sales; selling to school districts is a specialized skill and requires a dedicated sales force. But Amazon Web Services does enterprise sales, and it would be a grave error to assume that Amazon is not eventually coming after the textbook business. On October 17th, Amazon announced a new service called Whispercast that allows enterprises to purchase and manage content on multiple devices.
This is the larger context for the news that Pearson has just invested $89.5 million in Nook Media LLC, the digital business unit of Barnes and Noble Inc. The investment values Nook Media at $1.79 billion. Earlier in 2012 Microsoft invested $300 million in Nook Media LLC at a slightly lower valuation. The valuation is a little odd, since the parent company, Barnes and Noble, has a total market capitalization of $908 million as I write this post. Barnes and Noble still owns 78% of Nook Media, so if the rest of Barnes and Noble were worth precisely nothing, this would imply a total valuation for Nook Media of under $1.2 billion. It is possible that public market investors are saying that the bookstore business of Barnes and Noble is worth considerably less than zero. But it may also be that Pearson and Microsoft, as strategic investors, have been willing to pay a premium to a purely financial valuation of Nook Media. Call it the fear of Amazon premium. Perhaps Walmart, Bestbuy, and Kroger should join Microsoft and Pearson as investors in Nook Media.
I am a pretty loyal Amazon customer. In fact, after housing, childcare, healthcare, and food, Amazon purchases are my family's largest single expense. I read about a book a day, and we buy a lot of other products through Amazon, too. Amazon makes it very easy to buy. I am accustomed to getting the things I want with a single click. And supporting more than one e-book reading format seems like a lot of trouble. But I would hate to see Amazon wipe out every other creature in the education ecosystem, the way the brown tree snake wiped out the native birds of Guam--and then started eating pets and biting small children. One could see Amazon as an invasive species, like kudzu or the lionfish. I am an advocate of biodiversity. So perhaps it is time for me to start buying books in the Nook format....if it is not already too late.