BusinessWeek offers an interesting inside look to the bankruptcy of Borders. The perception that many people had was that this was a blow delivered by Amazon and ebooks, that there is no future to the bookstore. It might be true but the Borders case is not a good case in point, argues this article.
The piece points out that the store it is profiling here was actually very profitable, and increasingly so in the last few years. In fact, more than half the stores were in the black. The reason it closed was entirely due to the overall financial health of the company and a series of bad management decisions. It expanded insanely and wildly during the boom years, gobbling up ever more real estate as prices were soaring. When the bust hit, prices crashed and its investments in physical space suddenly looked stupid. This put massive pressure on the operation. It could no longer sustain its profitability expectations and its belief that the boom would last forever didn’t materialize. There were also a series of too-little-too-late decisions regarding digital media.
I find this account very persuasive. People without knowledge of the way business works always assume that any company that is going belly up was flopping, that people just weren’t buying the product. That is not usually the case. What it means is purely a matter of accounting: costs outran revenue and expected revenue. That can happen very easily with a few, small miscalculations. No matter how much success you are experiencing, it is the cost accounting that ultimately matters. This is true regardless of whether we are talking about a multinational with $5 billion in sales or the lemonade stand down the street. Every firm faces the same cost/revenue matrix.
Cost accounting rules, whether big or small, and this is true for everyone. This is the great egalitarianism of the market that is hardly ever noted or noticed by people who know nothing of business life.
To be sure, the book business must and will change, and dramatically. The old-line publishers will be buried. Laissez-Faire Books will be on the cutting edge. (Unpaid advertisement: please like Laissez-Faire Books FB page!)
Solyndra, the solar panel manufacturer who abruptly shut its doors last week and filed for bankruptcy, received a $500 million loan guarantee in 2009 from the Department of Energy, who was so eager to prop up President Obama’s “green jobs” initiative that it short-circuited its own review process to approve the loan, which probably had nothing to do with the sizable contributions Solyndra’s backers made to the Obama campaign. This is no doubt an embarrassment for the president, but I’m sure that had nothing to do with Federal agents swooping down on Solyndra’s offices on the day of his big jobs-plan speech. Happiness is never having to say you’re sorry, especially when you can throw some other guy in prison to cover for your own incompetence.
The next time someone claims that not having intellectual property laws will squash the little guy and let established companies rule the day, I’m going to remember to bring up Netflix. Mike Masnick at Techdirt reports on Blockbuster’s recent decision to file for bankruptcy — after the heroic Netflix has stolen most of their customers:
Late last week, there were a ton of press reports about how Blockbuster was preparing to declare Chapter 11 bankruptcy in September. It’s not shutting down, but just trying to restructure its debt, get out from under a bunch of store leases and try, try again. That said, this is yet another example of the fallacy of the claim of many that if you have a good idea some big company will just come along, copy it, and be successful. It also demonstrates the huge difference between idea and execution.
Netflix had a good idea and executed well on it. But for years everyone thought it was only a matter of time until the company got destroyed, because all these bigger (at the time) companies were just going to copy Netflix and win. First it was Wal-Mart. The retail giant started a service that seemed almost identical to Netflix way back in 2002. Everyone thought there was no way an upstart like Netflix could compete with the likes of Wal-Mart. Fast forward two and a half years and Netflix took over Wal-Mart’s online DVD rental business, because Wal-Mart’s offering couldn’t compete. …
And, of course, there was Blockbuster. It came out with a Netflix-like offer around the same time that Wal-Mart did, and while it held on for much longer, it was just never able to build up the same sort of userbase that Netflix did, and now the company is going to declare bankruptcy and try to restructure once again.
More at the link. It just goes to show that when you give people a little liberty, you never know what someone will come up with. A giant like Blockbuster or even WalMart can spend as much money as they’d like trying to copy an innovative, well-executed idea, but at the end of the day, the one who best pleases consumers will rule.
