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The Billionaire and the Book Lover

Barnes & Noble launched the Nook last fall and says it is now its best selling product. Display counters—or "shrines"—have been installed in stores.   

You might wonder why a company would care to trade one sale for the other, and plenty of people think there’s nothing wrong with the old ink-and-paper technology. “Most book buyers buy fewer than five print books a year,” says Michael Norris, of the market-research firm Simba Information. “They do not need a $100-plus device to help them consume a $5 paperback.” While digital-book sales are a substantial and fast-growing market segment—the firm Forrester Research estimates that they will amount to $500 million in 2010—they still represent just a fraction of the $24 billion U.S. book market. Skeptics question why Barnes & Noble would move out of its terrestrial stronghold, where it still does billions in sales. But Riggio knows that retail business models are constructed on precisely honed profit expectations, and with store sales down about 5 percent over the past year, he seems to have reasoned that he faces a stark choice: He can poach his own customers, moving into the digital realm and figuring out the economics later, or he can see them be poached by others.

A decade ago, when the Internet was just beginning to make its power felt, Riggio told a reporter that sometimes “I wake up and say that any business created before 1997 is going to be a fossil by the year 2010.” So give the man credit for prescience. Riggio has always prided himself on his ability to see the next plot twist coming. He’s the guy who started as a student clerk at the NYU college bookstore, making $1.10 an hour, and who dropped out to open a competing place, buying the old and ailing Barnes & Noble store on Fifth Avenue in 1971. He immediately began to expand. “There are 30,000 mini-delicatessens in American bookselling,” Riggio told Forbes in 1976, “and we are the only supermarket.” Through discounts and salesmanship, he put a lot of those delis, the independent bookshops, out of business, riding a wave of retail consolidation to build his nationwide chain. Snobs sneered at the superstore formula, but Barnes & Noble brought more books, at low prices, to every corner of the country.

Riggio sees this expansion of the literary marketplace—its “democratization,” he calls it—as his career’s great accomplishment, one for which he’s never been given proper due. In the nineties, publishers tended to regard him as a menacing vulgarian. Riggio felt that such treatment—like the inevitable references to his Bensonhurst upbringing and his cabdriver father (“this Italian tough-guy shit,” as he puts it)—was a product of ingrained elitism. “People in the world of literature,” he once said, “tend to look down on people who make a profit.”

Barnes & Noble began as a family business, and though it went public in 1993, Riggio never stopped running it like his personal domain. He brought his much younger brother Steve up through the ranks, eventually installing him as CEO. On the side, Riggio also made a wide variety of private investments, many of which were intertwined with the Barnes & Noble business. There was, for instance, the personally owned chain of college bookstores, which also went by the name Barnes & Noble, and which reimbursed the public company for shared office and warehouse space. The public company, in turn, paid the private one for the use of a Bombardier jet. Barnes & Noble contracted with a trucking company partially owned by another Riggio brother, Jimi, a deal worth millions a year.

Then there was the case of GameStop, a video-game retailer Riggio acquired out of bankruptcy for $59 million in 1996 and sold three years later for $218 million to Barnes & Noble, which invested $400 million in the chain and then spun it off in an IPO. “I believe Barnes & Noble shareholders made in excess of $2 billion on GameStop,” Riggio says. He did pretty well himself: He remains GameStop’s largest individual shareholder, and over the past four years he’s sold off around $250 million of its stock.

All of these transactions were duly disclosed in SEC reports and judged fair by the Barnes & Noble board, but they certainly raised eyebrows. “A lot of people thought, ‘It’s very cozy,’ ” says one former company executive. As long as business was good, though, no one aired any serious objection to Riggio’s overlapping interests.

And business was good for a very long time. It is surprising, in retrospect, that a company built around the virtue of exhaustiveness—of aspiring to shelve every single book—could fail to recognize the delivery potential of the Internet. But even after Amazon launched in 1995, roaring past Barnes & Noble and its lagging dot-com efforts, there was still a feeling within the company that everything was fine as long as the stores churned out money. The company’s retail people saw Borders as the real competition, and were fickle about investing in technology. “It was kept at a certain level,” says Daniel Blackman, a former Barnes & Noble web executive. “Enough to be meaningful but not enough to cannibalize.”