Technological change is a potent economic force. New technology brings new corporations to the forefront of business, while old companies gradually fade away.
Best Buy Co., Inc. (NYSE:BBY), Gamestop (NYSE:GME), Barnes & Noble (NYSE:BKS), Coinstar, Inc. (NASDAQ:CSTR) (NASDAQ:CSTR) and even Pandora Media Inc (NYSE:P) are all companies whose business models are fundamentally threatened by technological change.
Best Buy bulls will point out that the electronics retailer reported better-than-expected fourth quarter earnings earlier in March. Yet, those results were down significantly from the prior year. In fact, Best Buy’s earnings per share slumped by 25% compared to the prior year’s report.
Many of Best Buy Co., Inc. (NYSE:BBY)’s competitors have already gone bust (Circuit City) and others like RadioShack are struggling. Even if consumers decide they want to purchase their electronics in person, Best Buy is facing increasing competition from the electronic makers themselves (Apple Inc. (NASDAQ:AAPL)and Microsoft Corporation (NASDAQ:MSFT) have opened their own stores, while Google Inc (NASDAQ:GOOG) is rumored to be preparing its own retail operations).
That’s not to mention that Best Buy’s big box stores have gone from an asset to a liability. Many of the products that once occupied Best Buy Co., Inc. (NYSE:BBY)’s floorspace — DVDs, music CDs, video games — are increasingly being purchased through services like iTunes rather than in their physical forms.
GameStop Corp. (NYSE:GME)’s product is going digital
When Sony Corporation (ADR) (NYSE:SNE) unveiled the Playstation 4 on Feb. 20, the company went to great lengths to emphasize the console’s digital abilities. In a follow up interview, Sony’s president said that while all games would be available for digital purchase, only “some” would come on disc.
PC games shifted format from disc to digital long ago. Readers will be hard pressed to find much more than a rack or two of PC games at their local Gamestop. Meanwhile, new consoles like Valve’s Steam Box and the Kickstarter mega-hit Ouya do not even give users the option of physical games.
Investors have been concerned that Gamestop’s business would be jeopardized by console manufacturers implementing technology that would prevent new consoles from playing used games. Rumors suggesting that have plagued shares of Gamestop over the last year.
But the risk to Gamestop’s business isn’t that console makers would restrict the playing of used games; rather, video games — like music, movies and books — are increasingly purchased in digital form.
Barnes & Noble’s problem is much the same as Gamestop’s: Consumers increasingly favor purchasing digital books over physical ones. It isn’t as if Barnes & Noble didn’t see this coming. The company started selling its own e-reader, the Nook, in 2009.
Unfortunately, Barnes & Noble’s gambit with Nook looks more and more like a failure. So much so that the company’s founder and Chairman, Leonard Riggio, offered to purchase part of the company — the retail stores — in February.
Sales of Nook have lagged rival Amazon.com, Inc. (NASDAQ:AMZN)’s Kindle. Localytics reported in January that the Kindle Fire has roughly one-third of the US Android tablet market; the Nook has only 10%. This disparity is magnified when one considers that Barnes & Noble goes out of its way to sell the Nook in its retail stores; Amazon has no such retail operation.
Barnes & Noble shareholders might not be left holding the bag. If the company can sell the Nook to a larger tech company, and take its retail operation private, shareholders might walk away with some value. But as it stands now, the company is trending towards obsolescence.