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Kobo Inc. CEO Mike Serbinis (left) and Indigo Books & Music Inc. CEO Heather Reisman (Raina+Wilson/Raina+Wilson)
Kobo Inc. CEO Mike Serbinis (left) and Indigo Books & Music Inc. CEO Heather Reisman (Raina+Wilson/Raina+Wilson)

ROB Magazine

Inside the Kobo deal that netted Indigo $165-million Add to ...

When Reisman took her idea to her board, she got a very different reception. “For the love of God, do not go into the hardware business,” said Indigo director and former Microsoft Canada chief Clegg, who had seen too many hardware busts in his career. Gerry Schwartz recalls being less dramatic. “I didn’t agree with her,” says Schwartz, who has an aversion to technology start-ups. He thought his wife was overstating things when she said digital books would wipe out 50% of the traditional bookselling business. More importantly, he feared that Indigo would be crushed in a market already dominated by global heavyweights such as Amazon. If his wife was wrong, “it could have been unbelievably damaging” to Indigo, he says.

Faced with opposition, Reisman dug in, a stance she has the luxury of doing as a majority shareholder with her husband. “I did not quite agree with him. I did not think it was going to sink the mother ship. I thought it was something we had to do.”

Schwartz solved the impasse by encouraging his wife to find other investors to back the digital reader. Perhaps he thought the exercise of trying to raise cash would discourage her. At the very least, she would share the risks with other investors.

But what Schwartz and other critics underestimated was Reisman’s determination and the drive of her in-house network. As the tech blog StartupNorth would later observe, Indigo would soon make: “a big-ass, high-risk pivot.”

*     *     *

Attracting new investors proved to be the easiest part of launching what would become the Kobo reader. Tapping the large Hong Kong investor that had backed him at Critical Path, Serbinis convinced Li Ka-shing’s Cheung Kong (Holdings) to invest in the digital start-up. Reisman turned to her friends at U.S. book retailer Borders and its Australian chain to also buy a stake in the reader.

The tougher challenge was creating a unique Indigo e-reader fast enough to carve out a share of the digital market, which was rapidly being dominated by Indigo’s long-time rival Amazon, Barnes & Noble’s Nook reader and Apple’s new iBooks application for the iPad. (Although Sony was an early e-reader innovator, software and pricing issues have eroded its market share in North America.) At the time, Kobo’s ambitious strategy seemed lunatic. First was the pricing strategy. Indigo initially charged about $149.99 (U.S.) for the Kobo, a steep $120 discount compared with the Kindle 2 price tag. “It was a real make-you-sick-to-your-stomach kind of bet,” says Serbinis. The logic behind the low price was that Kobo would appeal to the average reader rather than affluent types who thought nothing of spending heavily for a costly Kindle. Based on Indigo research, Serbinis calculated that the average avid Canadian reader spent $200 a year on books. If they charged a bit more than half that for a Kobo, loaded it with classic out-of-copyright (hence, free) titles and offered low prices for digital bestsellers, he was convinced that consumers would flock to Indigo’s e-reader.

The second high-risk move was to quickly roll out Kobo readers in Indigo stores—by May, 2010, less than four months after the board approved Reisman’s strategy. The company found a manufacturer in Taiwan that agreed to the tight schedule. But there were problems. Thousands of the new units were shipped with the wrong power cords. And early editions of the Kobo did not have WiFi connections.

The final big bet was Kobo’s global strategy. As Indigo was preparing to introduce Kobos in its stores, Serbinis went back on the global circuit to find partners to promote the Canadian e-reader. Unlike the proprietary e-readers at Amazon and Barnes & Noble, Indigo wanted Kobo to be the e-reader of choice for booksellers and retailers that were not inclined to create their own hardware. “Normally you build something until it is perfected in your home country, then take it elsewhere,” says Serbinis. “Global was where we were always headed,” he says, because it gave Kobo the edge a small Canadian contender needed against mammoth U.S. competitors.

By the late summer of 2011, the strategy was bearing fruit. After a year of unveiling technical enhancements to the reader and global sales partnerships, Kobo had earned a distant third-place ranking behind Amazon and Barnes & Noble in the rapidly growing e-reader market. Although Kobo’s share was minuscule compared with its larger competitors, its rapid growth was astonishing. It had five million users in 100 countries, thanks to strategic alliances with major European booksellers including WH Smith and big-box U.S. retailers such as Walmart and Best Buy. Its simple tablet format, open platform and international connections were so popular that influential technology magazine Wired crowned it the “surprise” tablet winner of 2011.

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