E Ink's Q2 sales and gross margin decline, net loss increases

The Taipei Times reports that E Ink, the supplier of the electrophoretic displays used in most black & white eReaders, released its second quarter financial results yesterday. Revenues were approximately $149.5 million, down 35.37% from $231.3 million a year earlier. Gross margins were 0.6% vs. 32.5% a year ago. The company posted a net loss of $27.3 million vs. $26.3 million a year ago.

The fact that gross margins have collapsed (they were 1.1% in Q1) suggests that eReader manufacturers are putting tremendous pressure on E Ink to lower the price of its displays, and E Ink can't drive its manufacturing costs down fast enough to compensate. The Taipei Times report doesn't indicate how many eReader displays E Ink shipped, so it's difficult to figure out how to read the decline in revenue--but it's likely a combination of lower sale prices and lower demand.

Surveys in the U.S. suggest that the market for eReaders has peaked, and that color tablets will likely take the majority of the market in units over the next 12 months. (They already represent more revenues than eReaders.) There's still probably several years of life in the worldwide black & white eReader market. However, according to the article, E Ink will focus on other, more profitable applications for its displays, such as shelf price displays for supermarkets and convenience stores.

The end of Borders

By now, most of my readers know that Borders in the U.S. has given up on trying to find a buyer to keep its stores in operation, and plans to submit a liquidation plan to the bankruptcy court on Thursday. Despite Borders' management's claims, most of its wounds were self-inflicted: The company missed the key transitions in the book industry over the past several years. First, instead of investing in its own online presence, it partnered with Amazon and ended up sending traffic and revenue to the company that became its biggest competitor. (It eventually withdrew from the Amazon deal and created its own online store, but the damage was done.) Next, instead of building its own eReader and eBook infrastructure, it invested in Canada's Kobo and marketed its eReaders, as well as a mishmash of other models and brands. Kobo has only had a truly competitive eReader in the last two months, far too late to help Borders.

Now, at the 11th hour, Kobo is trying to get the bankruptcy court to give it a right of first refusal for repurchasing of Borders' share of the company. It's unlikely that Kobo's request will derail the liquidation plan. Assuming that the judge approves at least the retail store portion of the plan, going-out-of-business sales will begin in some Borders locations as early as Friday, with all stores expected to close by the end of September.

Beyond the loss of over 10,000 full- and part-time jobs, the biggest loss will be the closure of Borders' retail stores. No more than 50 stores are likely to be taken over by Books-a-Million and Barnes & Noble after Borders closes, and some areas will be completely without a local bookstore. Unlike Barnes & Noble, which built "cookie cutter" stores, many of Borders' locations are architecturally interesting, like its store in a converted movie theater in Palo Alto, CA.

Perhaps the saddest point is that Barnes & Noble's and Borders' aggressive discounting drove thousands of independent bookstores out of business. Now, Borders is closing, Barnes & Noble is struggling, and Amazon's strength makes it very unlikely that we'll see a renaissance of independent bookstores.