Silver lining in Borders’ bankruptcy for Canadian e-reader

Toronto-based Kobo Inc. shouldn’t suffer a major loss as its U.S. distributor declares bankruptcy and there may be a silver lining in Borders Inc.’s Chapter 11 filing and reorganization, according to e-reader industry watchers.

Borders, the retail partner for Canada’s e-reader company that is a spin off from Chapters Indigo,  filed for bankruptcy Feb. 16. While it closes 30 per cent of its stores – dozens across the U.S. – it will continue to conduct business as usual in its remaining bricks-and-mortar locations as well as online at Borders.com.

According to Borders’ public statements following its last quarterly financial update, the company is likely gearing towards a more digital focus. One bright spot in sales for the company has been e-readers and e-books, powered in part by Kobo.

Borders owns a small stake in Kobo, according to company spokesperson Mary Davis, but won’t disclose the size of that share. The two plan to continue their partnership, though Kobo is losing the part of its distribution channel offered by the Borders stores being closed.

“The e-reader was in all of our super stores as well as a number of our specialty stores,” she says. “We are moving forward with our partnership with Kobo. We will continue to sell their readers as well as continue to have them power our e-book store.”

Related Video: Hands-on review of Kobo e-reader

A Kobo spokesperson was not available for an interview requested by ITBusiness.ca, but CEO Michael Serbinis addressed the situation in a blog post. He described Kobo’s financial position as stable, referring to 2.4 million registered users around the world.

“While the e-book market is booming, the physical book market has started to feel some of the effects of digital growth,” he wrote. Borders’ “ebook sales represents a minority of Kobo’s worldwide sales… Kobo realized long ago that diversification across retailers and markets were important as the book industry went into a period of radical transformation.”

Related Video: Kobo’s iPad app demo

Kobo’s latest e-reader incarnation includes WiFi and sells for $149 in Canada. But Kobo has made its e-book store the bread and butter of its business, selling to myriad platforms including tablets such as the iPad, Android-powered devices, and the upcoming BlackBerry Playbook.

Kobo mitigates hit to U.S. distribution

That’s why the Toronto-based firm won’t suffer too much as Borders reorganizes, says Allen Weiner, e-reader analyst with Stamford, Conn.-based Gartner Inc. Kobo was also just one e-reader amongst several sold by Borders, meaning the sales derived were just part of the bigger picture. There’s even a chance that Kobo could benefit from this move in the long run as Borders looks to reinvent itself as a digital company.

“It’s a no lose game for Kobo,” he says. “If the strategy is successful, they benefit. If it isn’t, I don’t think they take that big a hit.”

In the last quarterly update of its financial results, Borders highlighted its e-readers as a diamond in the rough. Its third-quarter ended Oct. 30, 2010 with sales down 17.6 per cent compared to the previous year. But digital category sales were on a sharp rise, nearly doubling in that same period.

“We recently completed the addition of Area-e digital shops to stores to position Borders as a destination for all things eReading, with a goal to grow our digital and eBook market share. I want to point out that these enhancements required some reconfiguring of store space, creating a disruption, which adversely impacted sales for the quarter,” says CEO Mike Edwards, as quoted in the financial statement. Future plans for Borders stores include an expanded selection of e-readers, with an aim to grow the company’s digital market share.

The global e-reader market is expected to grow from $2 billion in revenue for 2010 to $8 billion by 2014, according to a report released earlier this month by Yankee Group Research Inc.

The biggest contributor to this growth will be the Asia-Pacific market. While North America accounted for 57 per cent of e-reader revenue in 2010 compared to Asia-Pacific’s 34 per cent, Asia-Pacific is projected to generate 49 per cent of that revenue by 2014 and North America 39 per cent.

Kobo’s sales at Borders are going well, according to Davis. “We’re pleased with the reader,” she says. “Our customers like the devices, the devices are selling.”

Long term doubts for e-reader’s place

Borders customers won’t lose access to their e-books library, Serbinis says in his blog post. Borders will also continue to offer support for the Kobo as it has been.

While Borders’ bankruptcy won’t crack Kobo’s spine and there aren’t any market forces applying pressure to drop the hardware yet, Weiner says, a plethora of devices coming to compete in the global market may change that. Kobo may end up asking itself some tough questions soon enough.

“What’s my differentiation as a device?” the Gartner analyst says. “Or is the device just sort of a Trojan horse to get into consumer’s hands so they’ll be buying books?”

Amazon’s Kindle dominates the U.S. e-reader market with about half of all sales, he adds. Barnes & Noble’s Nook follows at the number two position, and Sony’s e-readers are in third. After that, all other e-readers can be grouped into a large fourth category that fights for the remaining market share scraps.

“Kobo falls into that other group,” Weiner says. The company may choose to focus on being a leading e-book platform available on many devices in the long term.

Kobo’s e-reader is also sold at Wal-Mart in the U.S.

Brian Jackson is a Senior Writer at ITBusiness.ca. Follow him on Twitter, read his blog, and check out the IT Business Facebook Page.

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