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148 Part One Organizations, Management, and the Networked Enterprise

time, including the ability to manipulate and enlarge houses for colluding to fix e-book prices. In response
images, flip through photo albums, watch videos, to Amazon’s aggressive pricing strategy, publishers
read instant messages, and listen to the music of and Apple had agreed to an “agency pricing” model,
characters within the book. These books, called in which publishers set the price and retailers take a
“enhanced e-books,” are considered to be the next commission. (Under the wholesale arrangement with
step in the growth of digital books, but thus far, the Amazon, the publishers received half of the list price,
performance of enhanced e-books has been mixed. but this gave them no control over the pricing of
Publishers and e-reader manufacturers both are their product.) Many books would be sold by Apple
teaming up on enhanced e-book projects. Penguin for about $13, with Apple taking a 30 percent cut.
will release 50 enhanced e-books over the course By increasing the price of e-books by a dollar or two,
of 2012. Apple is working with publishers to create publishers stood to gain an extra $100 million. Even
interactive digital versions of textbooks. But do Amazon was under investigation for striking deals
readers really need these features? Some publishers with publishers that forbade them from offering the
believe that these apps cost more money than they same level of discounts provided by other e-reader
are worth, and worry that there is not a big enough manufacturers. The bottom line is that the DOJ
market for enhanced e-books to justify the expendi- action is bad news for publishers, who need B&N
ture of time and money. However, this is the same now more than ever.
line of thought that was used about e-books them- Because the Nook was booming and brick-
selves in the early 2000s, and e-book skeptics turned and-mortar stores had been stagnating, B&N has
out to be dead wrong. been considering spinning off its digital business
Publishers are doing anything they can to support from its fading bookstore business. On April 30,
B&N’s efforts to stay afloat, because the survival of 2012, Microsoft announced that it would invest
physical book retailers is important to effectively $300 million for a 17.6 percent stake in a new
market and sell books. Bookstores spur publisher company consisting of B&N’s Nook tablet and
sales with the “browsing effect.” Surveys have shown e-reader business and its College division. As part
that only one-third of the people who visit a book- of the deal, a Nook application would be included
store and walk out with a book actually arrived with in Microsoft’s Windows 8 operating system. This
the specific desire to purchase one. According to arrangement will provide B&N with additional
Madeline McIntosh, Random House president of points of distribution from hundreds of millions of
sales, operations, and digital, a bookstore’s display Windows users around the world, and both compa-
space is “one of the most valuable places that exists nies will share revenues from sales of e-books and
in this country for communicating to the consumer other content. B&N might eventually spin off this
that a book is a big deal.” Brick-and-mortar retail new company.
stores are not only essential for selling physical The deal also furthers Microsoft’s strategy of
books, but also stimulate sales of e-books and audio investing in new businesses to move beyond its
books. The more visibility a book has, the more Windows and Office software franchises. A Nook
likely readers will want to purchase it. With the e-reading app could also enhance Microsoft efforts to
demise of B. Dalton, Crown Books, and Borders, B&N establish a digital storefront to market e-books, apps,
is the only retailer offering an extensive inventory and other content for Windows 8, which is critical to
of physical books. Book publishers need a physical plans for entering the tablet market.
presence. B&N has also experimented with ways to drive
Without B&N, the likely candidate to fill the void traffic to their physical stores using apps on the
is Amazon, and publishers are not eager for that to Nook. Although this is a seemingly impossible
happen. Amazon’s goal for e-books is to cut out the task, they are at least coming up with some inven-
publishers and publish books directly, selling books tive ideas. For example, if you connect to a Wi-Fi
at an extremely steep discount to drive sales of its network in a B&N store with your Nook, you can
Kindle devices. Editors, publicists, and other entities get free extras in many apps and games like Angry
within the publishing business view Amazon as an Birds, where you can unlock a bonus character that
enemy. Selling books at Amazon’s prices is not a ten- normally costs a dollar. Other companies are using
able business model for publishers in the long-term. similar techniques to promote board games, toys,
Publishers received even worse news in April movies, and of course, physical books. B&N has also
2012, as the U.S. Department of Justice (DOJ) sued expanded its store space for toys and games and
Apple and five of the country’s largest publishing added new display space for its Nook devices. There

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