Inside the Kobo Deal that Netted Indigo $165 Million (And Smothered the US eReader Market)
A couple weeks back The Globe & Mail posted a lengthy look into Indigo Book & Music and their 3 year foray into the ebook world. I just found it, myself. It’s a fascinating read and if you don’t have time to get to it right now you should definitely bookmark it and save it for later.
It has a lot of inside details which I didn’t know. But it also has a number of the details wrong.
Some are minor, like whether the CEO of Indigo was shown a Sony Librie or Sony Reader in 2005, but at least one stands out as historical revisionism. Indigo did some smart things in creating Kobo, but they also made a terrible blunder. For example:
At the time, Kobo’s ambitious strategy seemed lunatic. First was the pricing strategy. Indigo initially charged about $149.99 (U.S.) for the Kobo, a steep $120 discount compared with the Kindle 2 price tag. “It was a real make-you-sick-to-your-stomach kind of bet,” says Serbinis. The logic behind the low price was that Kobo would appeal to the average reader rather than affluent types who thought nothing of spending heavily for a costly Kindle.
Guess what? It turns out that policy was lunacy after all. It put Kobo’s richer and more powerful competition in a position where they had to respond by dropping their own prices.
The hype surrounding Kobo, when combined with the steep price difference between the B&N Nook and the Kobo eReader, put B&N in a position where they felt compelled to match the price of the Kobo eReader. So when B&N launched their second ereader, the Nook Wifi, in June of 2010 they priced it at $149 and they dropped the price of the Nook 3G to $199. Less than 9 hours later Amazon responded by dropping the price of the K2 to $189, and that was all she wrote.
In a single day, Kobo’s pricing decision went from being a clever move to being a catastrophe. Kobo single-handedly killed off the US ereader market by forcing Amazon and B&N into a brutal price war. That one day in June also caused the demise of the RCA Lexi (yes, RCA had an ereader). And it likely caused Samsung to drop out of the US ereader market; their $400 ereader simply wasn’t possible anymore.
One might even go so far as to say that Kobo’s price policy created the situation that led to B&N spinning off the Nook and creating Newco. The development costs for the Nook platform were likely killing them, so much so that they got MS to subsidize Newco (it was in the fine print of the contract). What’s more, Kobo’s price policy could be argued as being the first step towards Indigo needing to sell off Kobo. The Globe & Mail article says it was becoming a money pit, and Indigo’s pockets were only so deep.
Still, this article is definitely worth reading – in spite of the flaws.
Comments
fjtorres July 8, 2012 um 8:40 pm
A couple interesting details in there.
On the reader pricing; I’m not so sure it was crazy at all. Just necessary.
Remember the reader hardware was a tweaked two year old Netronix design with so-so software at best. The pricing was about all the market would bear for *that* product.
So I wouldn’t lay the blame for the nine-hour price war on Kobo but on B&N who (as they often do) overreacted to a low-ball product by taking it too seriously. Dig up the early Kobo Reader reviews and you’ll find that most reviewers found the reader to be less than fully competitive with Nook, much less Kindle. Pricing it at anything close to the entrenched players would’ve been suicide–for the first 6 months, the lowball price (and Canadian availability) was pretty much all Kobo had going for it.
It took Kobo over a year worth of software updates to get to where it is now; a proper competitor to Nook and Kindle.
Of note, it looks like the Rakuten deal was actually a move of desperation on both sides; it sounds like Kobo was close to folding and taking Indigo with it when the deal was closed, and Rakuten barely got the Kobo ready for the Japanese market a bare week before Kindle got to Japan.
How good a deal Rakuten got is still undetermined but it’s pretty clear that playing the ebook game on a worldwide scale is a game for B-I-G players. Indigo got out at the right time, Sony is just muddling through, and B&N is looking iffy even with Microsoft funding.
Rakuten/Kobo? They’re making the right moves but the results…?
Too soon to sing their praises or bury them.
Nate Hoffelder July 8, 2012 um 10:37 pm
Except that Bookeen was already selling a similar model for more than the Kindle and they were doing okay, so there was no need to do an extreme discount. A slight discount would have been enough to draw readers, I think, without putting B&N in a position where they needed to respond.
The Kobo eReader sold for $120 less than the Nook. That was an extreme difference, and had it been smaller I don’t think B&N would have felt quite so compelled to respond.
fjtorres July 9, 2012 um 7:55 am
The Bookeen Netronix model shipped a lot earlier (Oct 2007, pre-epub, no less) and the software was better. So was Pocketbook’s 301 (2009). And the improved Pocketbook 301+ was clearly dated by that timeframe:
https://the-digital-reader.com/2010/06/22/review-pocketbook-301-buyers-remorse/
It was a big price drop from the industry leaders but it was a big feature and usability drop too. No wireless, no audio, no dictionary, no TTS, just 1GB onboard storage, limited typography, etc. You couldn’t delete ebooks from it without the desktop software. And both reader and desktop software was raw at release.
It was a barebones reader at barebones pricing.
(And B&N’s kneejerk reaction might have had something to do with *Borders* selling the Kobo in the US.)
Not that it’s all that critical by now.
It got their foot in the door and if B&N’s counter-move foreclosed the market to the hardware-only vendors, well… Let’s not forget that the Price Fix came into play at that exact time so Kobo and B&N’s business plans were both *counting* on 30% margins and no discounting on the ebooks. Neither needed much of a profit on the hardware whereas the Samsungs and Acers did.
Tyler July 9, 2012 um 8:22 am
The main article really glosses over big errors that Kobo made when they released their first reader. Yes, they introduced the Kobo at $120 lower (well that was the plan) but cut so many corners that the first Kobo was very slow, crappy 8 shade display, and no wifi!
When I went into Borders to pick up mine, no one knew how it even worked. They had them hidden in the back and had to call a manager to get one. That was a 5-10 minute delay. Why they were not kept up front at least behind the counter but on display is amazing. She had one to show me which was their display model but apparently kept under lock and key in the back. I looked at it for a minute (and memory fails me if it even was charged) and I got this sales pitch, "Ya want one?"
I bought it and took it home. It was crap. I was kind of sad because I had been purchasing books from Kobo for the past few months since they were spamming with coupons and had great discounts. That is, until the big six changed that. I took it back to Borders where I was told there were no refunds because it was an electronic item and the back of the receipt it says no refunds on opened electronic items. I had to call Borders HQ to get them to call the store and tell them to take it back.
I did eventually buy a black wifi Kobo for about $60 when it was closed out during the first rounds of Borders going out of business sale. I used it a bit and used it during a hospital stay since I figured if it were ripped off, it would be no big deal. It’s display is nicer. The big button is a bit clumsy at times but functional. At the time I got it, the nicest thing was the size. It was smaller than the Nook and a lot lighter. Battery life is crap in comparison to other e readers though. For an e ink, it really doesn’t seem to last too long and has to be charged every week.
Nate Hoffelder July 9, 2012 um 9:17 am
Well, I’m not sure Kobo could have done any better in building an ereader that year.
There weren’t all that many options available. In fact, I can only think of 2 designers who could have produced an ereader that quickly: Gajah and Netronix. The latter talked a good game, and they managed to get Pocketbook and Bookeen to invest in the hardware. That made them a safe choice.
And yes, Borders did have trouble figuring out how to sell ereaders, but then again Borders corporate had trouble tying their shoes.
fjtorres July 9, 2012 um 12:36 pm
You can’t really blame Kobo for the Borders in-store experience.
(It’s not as if they had much of a choice of partners in the US.)
And the raw nature of the Kobo reader at launch was a gamble–they either launched in the spring with a tweaked Netronix or waited another six months for an custom design. They obviously wanted to hit the market just as the Price Fix hit, so they went minimalist.
If you look at the evolution of their eink reader over the past two years they’ve clearly learned that minimalist wasn’t enough and now they offer a richer reading experience.
Entering a new tech market is always an exercise in risk-taking; "you place your bets and takes your chances". 🙂
Tyler July 9, 2012 um 6:16 pm
Sure you can blame Kobo. Why were there no demo models sent ahead of time so that they could hold a staff meeting and learn about it. Even if Kobo would not want to give units to each store and rish them get out in the open, they could have set up ones for district managers. If they sent out training videos or materials, who knows?
This was suppose to help Borders stores. Each Borders Kobo was linked to the Borders Store, not Kobo bookstore. This was the future of Borders and the launching in the US for Kobo. You can not ever replace a first impression.
Yes, Kobo has had a tough learning curve. The messed up with their first e ink reader and their first android Vox which has never seen the light of day in the US at a retailer. Previously Nate reported that Best Buy was going to carry them but they were only available online. I have seen one in a Best Buy store which was one I bought and returned after ordering it online. Hopefully there will be a Vox II.
I actually hope that Kobo succeeds and at least stays in the game. I like the underdog story! I still buy books with their discount coupons.
Peter July 9, 2012 um 1:09 pm
Simple consumer economics caused the ereader price war. Kobo, BN, and Amazon simply participated.
Even with ads, ereaders are STILL overpriced at $60. The average consumer reads two (2) books a year. A hardcover costs $25-$30. Therefore, quality, single purpose ereaders MUST drop below $50 or forever be a niche product.
Unfortunately, ereaders don’t cost less than $40, and with the agency model gone, probably never will. So much like ecommerce before them, ebooks are simply less efficient -for MOST consumers- than the old way of doing things.
Unfortunately, people refuse to believe this. We think if it makes sense for a niche market today, it’ll makes sense for everyone tomorrow!
So we have a bubble.
The companies know this, and they play it accordingly. Jeff Bezos is making billions selling his own Amazon shares, and Indigo and BN simply sold off their ebook units at the peak of the bubble, to recoup expenses and return to the tried and true.
Tyler July 9, 2012 um 6:23 pm
Actually there are 25% of Americans that do not read at all and the average American reads 9 books a year. There are plenty of people still buying books. The market is pulling the price lower. Whatever Amazon sets their reader price this fall is what they will be for Christmas.
It wasn’t simple economics. Do you think Amazon and Barnes and Noble really wanted to lower their prices to compete with Kobo? They would never have done so that summer except for Kobo’s low price.
The winner is the consumer who did get e readers far cheaper and far sooner than they would have if Kobo never entered the market. The blunder is that they lowered their prices so low before they knew that Kobo I was seriously lacking. But then again, both would want to bury Borders.
Alexander Inglis July 9, 2012 um 6:13 pm
I don’t see how you can claim Kobo made a big blunder pricing its ereader to get noticed at a time when a dozen or more players were in the market. Further, the proof is in the pudding: who’s still standing? Kobo was routinely written off in it’s first year (if mentioned at all) — and often still is. Yet, Indigo had the vision to finance the star-up and make a decent profit; and Rakuten clearly aims to make a long-term profit, too. When you compare the shoestring investment behind Kobo with the huge investment behind Nook; when you compare Sony’s massive international presence and lead over Kobo in 2010; when you see Kobo and Kindle racing to open the same new markets; when you see several other players try to make an ebook store successful while Kobo has succeeded in trying … if this is "lunacy" and "catastrophe", then carry on!
Simon July 10, 2012 um 3:25 am
I wonder how much of Kobo’s "success" (i.e. staying the game) until the Rakuten had to do with their Canadian base (disclosure: I’m Canadian).
Canada has protectionist culture laws (which I support), though I’m not sure what they are in the realm of book-selling. At the same, Indigo, starting in the 1990’s, was able to create a nation-wide chain of B&N/Border style super-stores, buying out their only competitor, Chapters, along the way.
In a way then, during the crucial time, Indigo was essentially in the position of a sheltered monopoly. The entry of Amazon.ca in the mid-2000’s was a threat, but I don’t think it began to bite until around 2010, and the wholesale move to online shopping (which arrived later in Canada). This is when Indigo began to transition to "cultural department store)".
Thus, Indigo had a window of opportunity before international ebook players and online book-selling completely undercut them. They exploited it well.
Nate Hoffelder July 10, 2012 um 7:01 am
It did take Amazon a long time to open a Kindle Store up there, didn’t it?
And yes, Canada’s protectionism probably did prop them Indigo/Kobo.
Porkupan July 10, 2012 um 11:08 am
So a billionaire’s wife likes to go into "business" of her own. With her husband’s full backing of course. She hires "experts" (in this case a "technology guru" and a supposed "rocket scientist") who tell her what to do and how to do it. She still ends up loosing tens of millions a month, but gets saved at the last moment by a Japanese honcho with tons of money, good negotiating skills of her husband’s, and useful connections in Heritage Canada. She ends up getting out of the money black hole just in time to make a little profit (her main "venture" in the meanwhile is probably losing that much per year). What else is new?
The comments to the G&M article are pretty unanimous in their characterization of the article as a poorly researched puff piece. I honestly don’t see any value in Mrs. Reisman’s contribution, other than her money. It seems that she didn’t demonstrate any particular technological "vision" either. Expanding into B&M book retail while Borders was already crumbling and Amazon was about to take on Canada, was not a very smart business decision. Then trying to wiggle into the ebook and ereader business, and causing some seriously unwelcome disruption before getting the heck out of the burning building. I suspect her B&M biz lost much more due to aggressive Amazon and ebook competition than the $165 million she made on Kobo.
The "rocket scientist" purportedly drew the Kobo ereader design on a napkin, and it ended up exactly like the other Netronix crap-boxes being OEM’ed to retailers throughout the world. That’s genius! A few months later Kobo goes on dumping the beta level boxes onto the unsuspecting Borders booksellers who had absolutely no idea what to do with them. I remember screaming customers at Borders demanding their money back. People trying to get some support for their unexpected X-mas gifts. And those shelves full of blue and white Kobo boxes all over the store that was already emptying out of paper books…
Kobo’s online bookstore was not bad actually. I only bought a few ebooks there, but the experience was nice. It was well integrated into the Borders online. And I could read their ebooks on my Sony Readers, which was an advantage. I wouldn’t be surprised if in the near future Sony and Kobo/Rakuten will integrate into a single ebook retail infrastructure. I wish they had done it 6-7 years ago though…
Nate Hoffelder July 10, 2012 um 11:14 am
"The “rocket scientist” purportedly drew the Kobo ereader design on a napkin, and it ended up exactly like the other Netronix crap-boxes being OEM’ed to retailers throughout the world. That’s genius!"
That was funny, wasn’t it? I left it alone because I figured the writer might have gotten the original Kobo eReader confused with the Kobo Touch.
And as for it being a puff piece, these things usually are. I only try to extract the basic facts.
Simon July 10, 2012 um 1:54 pm
Thanks to Nate for reading that article, because I didn’t have to.
It was essentially a puff-piece, which is to be expected given the financial power of Reisman’s husband, and her own resulting heft in the cultural milieu — a dynamic operating in relatively small country like Canada.
It is also a sadly Canadian kind of "success story" and characteristic of our risk-averse capitalism. Congratulations! You just sold out to a foreign company! Americans or Brits don’t think this way.
Nate Hoffelder July 10, 2012 um 2:09 pm
Welcome.
TBH I think I’ve learned more from the comments (here and there) than the article.
fjtorres July 10, 2012 um 3:14 pm
Don’t be so sure.
That’s a common business plan in Silicon Valley: cook up a high concept start-up, get lots of mindshare and visibility while burning your startup funding, then either sell to a big pre-existing company or run an IPO, to cash in the visibility just before the crash.
Lots of small companies did that during the "internet boom" of the 90’s. The most notorious being AOL. 😉
Harold July 10, 2012 um 9:22 pm
There’s one big fallacy in your presumptions. Kobo has close to zero market share in the US and Amazon and Barnes had little reason to respond to Kobo. Kobo is great at releasing weekly press releases, but you can’t take them seriously. Ask the US publishers how much share Kobo has in the US and you’ll find they ave less than a percent or two. Nothing.
Nate Hoffelder July 10, 2012 um 10:05 pm
That’s ebook market share, not ereader. And things are different now.
Back then Kobo had nothing but hype going for it, and it wouldn’t have been hard for B&N to fall for the hype.
Tyler July 11, 2012 um 1:41 am
!00% correct. Kobo had lots of hype right before the release of the first Kobo and they fell for it.
Tyler July 11, 2012 um 1:43 am
I did see a Kobo Vox in stock for sale at a Best Buy today. They had a few in the ages where they keep the ereaders but this store did not have one on display. LOL!