Enterprise Software and the Barnes and Noble Tragedy

Last week, I read that Barnes and Noble is putting itself on the block, or as they say in public company statements, “seeking strategic alternatives for the business.”  This is a sad day for a great company that once dominated the book business. But as we have seen over the last 10-15 years, technology has driven dramatic changes in the business landscape in virtually every market. Companies that are rooted intraditional, heavyweight distribution models are having a very tough time fighting competitors who reach the customer through a low friction internet based model. I expect to see similar disruption in enterprise software in the coming years.

If we look back in time, we see that Barnes and Noble and Amazon.com shared a similar market capitalization in Q3 of 2001.  But since then Amazon’s market cap has skyrocketed to 56 billion, while B&N sits at around 900 million.


Market capitalization of Amazon.com vs. Barnes and Noble since 1999.

Fundamentally, this is a story about channel focus. At the time that these companies had similar market caps, each was fundamentally in the business of selling books. (And yes, Amazon has since diversified, but remains at heart a retailer, just as B&N is.) The most striking structural difference between the companies is the distribution channel: how the customer discovers and purchases the product, and how that product is delivered to and consumed by the customer.

Amazon is a web business to the core. It sells 100% of its products over the web. With the Kindle, it even delivers virtual goods over the web rather than physical goods to the customer’s door. By contrast, Barnes and Noble’s culture and history is deeply rooted in its network of 720 retail stores. If B&N wants to reach a new geographical market, it must almost certainly have to build and operate new stores to do so. For Amazon.com, the relative cost is far lower, and their approach is far more scalable.

I’m sure the board and executive team at B&N have for many years fully appreciated the benefits of a low-friction, highly scalable go-to-market model. They have invested heavily in BarnesAndNoble.com and the Nook. But as I have written in the past, it’s virtually impossible for large, established companies to change their distribution model and succeed against a competitor that has the superior business model in its DNA.

Amazon.com traffic vs. BarnesAndNoble.com - 12 months

In the coming years, we will see similar stories develop in enterprise software. Not with the same dramatic ending – no, I don’t expect SAP to go on the block for pennies on the dollar anytime soon. But I do expect to see a wave of new companies turn the enterprise software model on its ear, the way Amazon has done for the books (and retail in general.)

If you swap out “retail stores” and replace it with “on-premise direct sales reps,” it’s easy to see how companies like Oracle, CA, SAP etc. are saddled with their own expensive, complex and burdensome distribution channels. Companies that provide better, less expensive software directly to the customer over the internet without a heavyweight, high cost sales force will trounce the competition for new business over time.

Like Barnes and Noble in its own space, we’ll see these larger companies attempt to make their move towards more attractive distribution models, and provide their own SaaS solutions. They will attempt to take them to market as a complement to their existing business models. We’re already seeing companies like CA, IBM Tivoli, Compuware and HP pay lip service to on-demand application performance management. But I believe that these offerings will struggle to compete with pure-play SaaS vendors in the same way that BarnesAndNoble.com has struggled against Amazon.com.

We have seen this pattern in other markets as well.  Below, here’s a comparison of the “Old” and “New” business models in a few markets.

Market Old Model New Model
Books
B&N vs.
Amazon.com
720 Retail Stores. Multiple attempts to move to lower friction business model including B&N.com and Nook. Company is looking for “Strategic alternatives including a sale”. 100% Internet purchase and delivery, electronic books already overtaking hardcovers.
Music
Tower Records vs.
iTunes
Retail Stores, Physical CD’s, ~$15 each. Failed attempt to transition to web distribution model. Bankrupcy and liquidation in 2006 99¢/song, instant 24×7 online access to a library of more than 13 million songs. Is now the largest music retail business in the world.
Project Management Software
Microsoft Project vs.
37signals Basecamp
$999 per seat, DVD install, local maintenance. Microsoft Project isn’t going away soon, but don’t expect interesting growth rates for this model $24-$149 per month per account, unlimited seats, SaaS delivery model. The poster child for success in the world of web business software.
Application Performance Management
CA Wily et al vs.
New Relic
On-premise software, global direct salesforce, $8K+ per CPU + 20% maintenance. High TCO. SaaS delivery, self-service purchasing, small inside sales force. $50-$200 per month per Server, irrespective of CPU count. Near zero TCO.

Queue up the Bob Dylan LP – I mean CD – I mean .mp3. The times, they are a changin’….

Founder and CEO, New Relic. View posts by .

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