How long has the acquisition been in the works?
We first met the Rakuten team in the summer and we talked about different ways we could partner, and through the course of getting to know them and them getting to know us, it really struck us that this was a perfect fit and a great way to accelerate our growth going forward. So it's been about a few months.
What sorts of opportunities does the deal present for Kobo?
We've been competing on a shoestring against Goliaths with billions on their balance sheet. Now we've got a Goliath backing us.
Well, Rakuten have got over 50 million customers worldwide, they're the number one commerce player in Japan -- I think they are four or five times the size of Amazon there, and they've been making acquisitions around the world, really growing their national footprint. So, it provides us with financial muscle. We've been competing on a shoestring against Goliaths with billions on their balance sheet. Now we've got a Goliath backing us. It gives us reach. We can expand internationally quicker. We've always had the position of being a global player, and now we can just get there faster. There's a lot we can do on the social front between our Reading Life platform and Rakuten's commerce properties around the world.
Amazon's strategy has been to provide a device for the lowest possible price and use it as a platform with which to deliver content. Is that the sort of strategy that you guys are looking at as you move ahead with this acquisition?
It's absolutely been our strategy from day one. When we introduced our first e-reader, the Kindle was $300. We were the first to introduce a reader at cost with our first Kobo reader in May of 2010. We brought it to the market for $149 -- half of where everyone else was at. It's our way of having a rich connection with our customers so that they can consume content. For us, the business is about the content, and the device is just a great way to connect customer and content.
You've cast Kobo as a David amongst Goliaths. Does the Rakuten deal impact that underdog perspective?
Two-thirds of the global book market is outside North America. I plan on getting a big share of that two-thirds.
One of the things that attracted us to Rakuten is their philosophy when it comes to their group of companies. Kobo's going to continue to run as an independent entity based here in Toronto, operating globally. All that really changes is that I have some new shareholders and a new board, but we continue to run our play internationally with financial muscle and geographic reach where we need it. Obviously, Japan's a great market, being the second largest economy in the world. We would have no space but to be number one in Japan with Kobo and e-reading.
There's new markets like Brazil that are exploding from an e-commerce standpoint, and a lot of these markets don't have the Seattle-centric e-commerce player. We're working with the number one player in a win-win relationship and we can own 50-percent of the market.
We can dominate, on a country-by-country basis. Two-thirds of the global book market is outside North America. I plan on getting a big share of that two-thirds.
Were you seeking out a deal like this? Obviously things changed for the company a bit after Borders shut down.
The change in Borders was a bit of a setback. We partnered with Borders, but we also partnered with Best Buy, Target, Walmart and we're now in a bunch of other retailers. Unfortunately, Borders didn't work out. We've recently partnered with Facebook. We're the only e-book partner to deeply integrate with it in the ticker and timeline. MOG and Rdio have doubled, tripled and quadrupled their user bases since working with Facebook, so we expect to be a player in the US. There's more than one way to skin a cat, and look, there's no guarantee that Barnes & Noble has the cash to run their play.
You've suggested that the closure of Borders didn't impact the decision to sell to Rakuten.
The Borders situation was an unfortunate one, but it had zero to do with this.
Yeah, the Borders situation was an unfortunate one, but it had zero to do with this. Officially Kobo wasn't for sale, and this wasn't a situation where we said, "there goes the US now that Borders is gone. Time to sell the company." That was absolutely not the situation. We had a number of strategic options in front of us, and when our board came to a conclusion that it wasn't purely about cash and raising cash, it was about winning the game and to win, cash was a piece of it, financial muscle to back us was a piece of it, but so was reach and e-commerce expertise and really being able to connect into an overall global commerce platform. So they were the perfect fit. That was what really drove the ultimate sale. Indigo as a majority shareholder wasn't looking to add to their balance sheet through a sale. It was really a great opportunity.
Kobo has obviously expanded into the tablet space recently (with Vox). How much longer will the devoted e-reader space be a viable one?
I absolutely see the e-reader space being viable. It's going to be the lion's share of our sales this year. We'll see about next year, but what's clear is that there are customers and segments of the population who want to focus on a great reading experience and don't want to be connected to apps and music and everything else. Then there's the other readers, some of them casual. Some of them want to be connected and want a color experience and are okay with the different benefits and features that a tablet style device brings. I really see the tablet as more of expanding our market and allowing us to reach new kinds of readers, as well as new price points which are important to our retail offering.
So the Vox tablet is more the logical extension of the reader experience, rather than an entirely different space?
As we looked at the spectrum of customers and their desire for different kinds of content, we felt that it was a must have to bring a color device that gave the reader with the connected life a great affordable product. Now where does that bring us going forward with Rakuten? The possibilities are endless.
You've spoken about how stiff the competition is in the e-reader market. You're contending with Amazon and Barnes & Noble in North America and Sony in Japan. But it seems like the tablet space is even harder to crack into these days. Everybody's got a tablet at this point. What are you guys bringing to the table?
In the beginning of 2010, I went to CES, and there were 200 e-readers. We'd just launched, and I thought, "Wow, we've got to execute out of our minds to be successful" -- and we did. So, I look at the tablet space now -- around the end of last year there were supposed to be some great hopes entering the market, and all of them chose us to be their e-book partner. Whether it was Samsung, the PlayBook (which was delayed and eventually came out), Acer, Asus, HP. The collective market cap is in the hundreds of billions, or maybe even closer to trillions, and none of them have been successful so far. What that tells you is that the core electronics under the hood are being commodified, and it's really about the overall experience and bringing the content to the customer.
This concept that your library, your content is going to be with you forever, but the device will come and go, and you pick up where you left off, whether it's a page of your book or your overall music library, the moment you fire up your new device. That's been a core part of our strategy from the beginning and we've proven that we can run faster cycles to launch these products than our competition. We get better and stronger every time, and meanwhile guys like Samsung and RIM have really struggled to make a dent in what iPad has done.
Amazon entered the tablet space around the same time, and the Fire also seems to be an extension of their e-reader, much like the Vox.
This whole idea of the 383rd Harry Potter review being what moves me to make a purchase has gone the way of the dodo.
If you look at this globally, we know that it's not going to be a one-horse race in the majority of the world. Amazon isn't the player there that they are in the US. Secondly, we partner on a country-by-country basis with a leading player that's got the best book-loving customers and develop a win-win relationship. And then, thirdly, we believed from the start that discovery of content and how people connect and express themselves around that concept is fundamentally going to change. This whole idea of the 383rd Harry Potter review being what moves me to make a purchase and read a book has really gone the way of the dodo.
Can you give numbers in terms of how many readers have been sold this year?
We don't disclose the numbers on the hardware but I can tell you that from a user base of people downloading and buying books on a weekly basis with Kobo, we've gone from just north of 2 million at the end of Christmas last year to just shy of 6 million right now.
Has the Touch reader become your most popular device?
The Touch reader has been a great seller this year, but we're now a week or two into Vox, and we're probably going to run out at some point before Christmas.
Kobo currently has three devices on the market -- the Vox, the Touch and the previous generation reader. Is that going to continue to be a comfortable number?
What's really key is having a lineup in order to reach your different segments of your customer base, and price point is a point of that, usage profile is a point of that. I'm not sure it's as much the number as much as it is whatever we need to reach the customers that we want to attract to Kobo. Again, going country by country makes for a more complicated answer, but three to five devices in the next year is probably the right range.
So, are there are new areas opening up in the reader space that you haven't quite hit yet?
Yeah, there's a ton of opportunity. There's categories that really haven't even been touched yet. Kids is a great example. Kids sub-12 and adolescents -- there's great opportunity in those categories. There's opportunity for college students, and there's opportunity for different form factors.