Books Without Borders: Collapse of a Business Model

I can't help but feel partially responsible for Borders going out of business. I do not own an e-reader. I still purchase books -- paperbacks, hardcovers, you name it -- using my Borders Rewards points and daily (recently, almost hourly) discount coupons. I haven't paid full price for a book since... I don't even recall. (It might have been when Stephen R. Donaldson's A Man Rides Through came out, and don't ask me how I even remember that.) I also refused to upgrade to Borders Rewards Plus for a lousy $10 because I was in too much of hurry that day to get out of the store and on to actually reading the book I'd bought.

Analysts say the main reason Borders will liquidate as early as Friday is its inability to keep pace with the digital media age. Its Kobe e-reader failed to gain any kind of traction against the Kindle or the Nook, and consumers prefer to get their music and videos online. Borders failed to see its customer base was changing, and, as a result, it looks as if it is going to join the ranks of many retail anchor stores that are now defunct. In short, its business model is now passé.

A similar situation was taking place in the electronics industry about 10 years ago when component buying was moving to the Internet. Between the years of 1995 and 1999, hundreds of Internet companies sprang up with a business model that was going to make the wholesale distribution model obsolete. Every component available at the time could be purchased on the Internet and they could be purchased through authorized channels, brokers, auction sites, buyers' clubs, or any combination thereof. OEMs, component makers, EMS companies, distributors, and software companies all got into the online business.

The companies most likely to become extinct at the time were electronics distributors. These companies had this archaic idea that someone in the supply chain actually had to buy and maintain physical inventory. Online buying was going to render that business model obsolete in a mere three to five years, conventional wisdom said. By that measure, EETimes's and EDN's Top 25 Distributors lists would have disappeared completely by 2005.

As it turns out, some distributors did disappear. For the most part, they were acquired by the world's two largest distributors, Avnet Inc. (NYSE: AVT) and Arrow Electronics Inc. (NYSE: ARW). And a funny thing happened on the way to 2011: Arrow and Avnet are now bigger than most of their component suppliers, and they've outlived every online buying site I can think of. Those that are still around are now vastly different than they were at their inception. (Believe it or not, iSuppli Corp. was one such site.)

So why is Borders a casualty in the digital age and Arrow and Avnet are not? I think it boils down to the difference between hardware and software (or in the case of books, music, and video, hardware versus content). Content can easily be turned into bits and bytes and be downloaded and stored and then accessed by any user willing to license or purchase content for a small fee. But these users must have the hardware to do this, whether it's some version of an MP3 player, an e-reader, a tablet, or a smartphone. As long as the electronics industry requires components to build the stuff it makes, wholesale distribution should be OK. As soon as everything you need can be downloaded as software, it's not just the distribution industry that will be toast. But that's still a ways away.

The Borders lesson for business is this: Make sure you are keeping track of the demands of your customers, and stay one step ahead of the competition. Oddly, the lesson for consumers such as myself is pretty much the same. At some point, if I don't buy an e-reader, tablet, or smartphone, the books I love so much will be beyond my reach. Time to start shopping.