GigaOM Pro

Source: flickr user JustinLowery

This week, Barnes & Noble did what almost seems impossible for a large-scale content retailer in the age of digital distribution: It grew revenue and turned a profit for the most recent quarter ending, despite the onslaught of the e-book.

Naturally, such stellar results must have been cause for celebration on Wall Street, right? Wrong. In fact, the company’s stock is down since reporting results, in large part because of the negative reactions to the company’s (wise) decision to halt its dividend to free up funds for investment in digital.

The negative reaction of Wall Street is not surprising, given the long shadow cast by Borders’ recent bankruptcy. The two companies are, after all, the Coke and Pepsi of book retailing, so its natural to think the fate of one foretells the demise of the other.

But as is seen in this excellent answer on Quora from former Borders employee Mark Evans, there are substantial differences between the two companies, and the most important one is the fact that Borders outsourced the major growth area (online) of its business to Amazon, while B&N retained ownership (and hence control) of its online destiny. In the end, retaining ownership of online was absolutely crucial, as it taught B&N how to be an online retailer.

It’s this “build-your-own” philosophy that also led to B&N creating the Nook e-reader and e-bookstore, which has, according to B&N, resulted in the company amassing a 25 percent share of the U.S. e-book market.

Nonetheless, B&N continues to suffer the cost burden of big brick-and-mortar retailing, and its online business, growing as it is, led to a loss of $50 million in the third quarter. But even with warts and some heavy caveats, B&N may actually be on track to pull off a trick that pretty much no one expected: Transitioning to a profitable dual retail/e-tail model in the age of digital distribution.

To get there, however, there are a few more radical steps it should take to transition fully into becoming a successful dual retailer/e-tailer.

Downsize Retail Footprint: At some point in the next decade, B&N should (and probably will) start to see itself as a digital-book retailer with some nice-to-have physical storefronts as an accompaniment. Because online and e-books is where the vast majority of growth is, B&N should accelerate unloading of unprofitable locations to decrease their sizable real estate costs.

Expand the Nook: B&N made a very wise choice in creating its own e-book platform; it should double down. The Nook brand is resonating, despite huge competition from both the Kindle and iPad, so the company should broaden the line upward with a larger-screen (possibly vertically targeted) device for, say, the education market to go with its Nookstudy program, while dropping the price of the low-end device to $99 or less.

And most importantly …

Eat Up More of the Publishing Value Chain: While B&N has dabbled in publishing, in the digital world, it’s every bookseller for itself, and the company should follow Amazon’s lead to eat as much of the book-revenue pie as possible as a publisher. B&N launched Pubit!, its self-publishing e-book platform, but it needs to proactively become the publisher through chasing promising authors and even displacing other publishers. In other words, it needs to disintermediate before it becomes disintermediated.

To paraphase Sean Parker’s character in The Social Network, getting e-book nickels and dimes from being just a retailer isn’t cool. What’s cool is getting e-book dollars, and to do that, B&N needs to own the entire value chain.

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