A familiar headline has been dominating the business pages for the last few days: A big company is planning to spin off part of its business as a standalone unit. This time it's not Hewlett-Packard and the PC business; it's Barnes & Noble Inc., and the business unit is the Nook. B&N is expecting a big loss for 2011, due in part to slower-than-expected sales of its e-reader/tablet.
This holiday season has offered a ray of hope. Barnes & Noble said device sales had risen 70% for the nine-week period ending Dec. 31, compared with the year-ago period. It said the Nook business is likely to notch $1.5 billion in sales in the current fiscal year, compared with $880 million a year earlier. That business includes the Nook devices, digital-book sales, accessories, magazine and newspaper sales, app sales and sales of warranties.
Unfortunately for B&N, the Nook Tablet was introduced right on the heels of Amazon.com Inc. (Nasdaq: AMZN)'s Kindle Fire. There's also the 800-pound gorilla of the tablet market, Apple Inc. (Nasdaq: AAPL), to contend with. To most analysts, the tablet race has already narrowed down to two contenders.
The Nook tablet retails for about the same price as the Kindle Fire -- $200. So why is B&N failing where Amazon is succeeding?
Part of the reason is B&N's business model: It is still a predominantly brick-and-mortar company. Unlike Amazon, which doesn't own any storefronts or inventory, B&N maintains a huge retail presence and a vast stock of books, CDs, DVDs, and games. It has also spent a lot of money developing and licensing digital content for the Nook. The cost of marketing the e-reader/tablet has put pressure on B&N's earnings, according to the WSJ:
But those sales have come at an enormous cost. Developing, manufacturing and promoting e-readers and tablets requires heavy upfront spending. Barnes & Noble's spending on advertising has more than tripled since 2009, according to Kantar Media, an ad-tracking unit of WPP PLC. To promote the Nook, the retailer returned to national TV advertising in 2010, after a 14-year hiatus, buying spots on popular programs such as "American Idol."
Does it make sense for B&N to spin off the Nook business? I think it does. The Nook tablet is getting good reviews from users, and the available content pool is widening. However, hardware development costs a lot of money in the form of R&D, engineering, and manufacturing. B&N will have to invest heavily to keep pace with the likes of Amazon and Apple. If B&N earnings remain under pressure, the company may increasingly be forced to decide whether it should invest in its retail business or its digital business. Rather than sucking B&N's retail business dry, uncoupling the Nook from B&N's bookstores may give the Nook room to grow.
But B&N should retain a part ownership in the Nook business as it downsizes its retail presence. The demise of Borders is a clear signal the print market is fading. An arm's-length B&N/Nook relationship could keep the Nook's content offering fresh and may help B&N make the transition from print to a digital business model. Another scenario would be selling the Nook to a company that was founded on a non-hardware model (think Google or Microsoft) and let B&N focus on digital content.
Either way, a Nook spinoff could add a viable third contender in the tablet race that has so far been dominated by Apple and Amazon.
Barnes & Nobles has built a successful digital business with Nook, but its success has been predicated on the key assets it may lose in its potential spin-off. Besides its stores, the company has a strong channel relationship with publishers that wouldn't necessarily carry over if nook became a standalone business.
Does the company as its considering a spin-off, has the resources necessary to undertake international expansion, an investment that will become imperative as its competitors such as Amazon?
why buy an e-reader, when a more fully functional tablet can serve that purpose, and much more?
@Eldredge, there are lot of advantages of an e-reader over tablet. e-readers are intended to make avid book readers feel as if they are reading a printed paper page. And since there is no backlight required in the eReader,they dont cause eye-strain.
t.alex: I know that e-books can be accessed from a number of sites/providers, including B&N and Amazon. What I am not sure of, and will investiagte, is how the licensing and digital rights are handled. Or possibly readers can help? In other words, does an e-book provider/device maker have to license Steven King's books, or does the publisher handle this? I'm sure it's easy to find out, I just haven't looked into it. To your earlier point, I'm still a fan of print, particulalrly when traveling. There is a "read it and trade it in" system in airport bookstores that I like--and since I am a fast reader, I can read something from point A and trade in in at point B. I know e-readers offer the same and possibly better service, but since I am already lugging my laptop and cellphone, right now an e-reader/tablet is something else I need to worry about charging...
I still love to hold a book instead of a tablet or e-reader. But I realize one thing: people can also order books via Amazon as well. Isn't it a great threat to B&N?
I suspect Barnes & Noble is in a market that's declining faster than the company can shore up the defenses. I don't really need a Nook or even a Kindle Fire to read ebooks or surf the web. You'll be amazed at the effectiveness of some of today's smartphones. I am gradually getting used to the small screens of these products, a defect (if it is) that is quite easily redeemed by the clarity. Without its enormous e-market products, Amazon couldn't have made a dent in the tablet PC market and if all Barnes & Noble has to offer is access to a few publications or its website, the company is headed downhill.
B&N is now heavily discounting the Nook tablet for people that subscribe to select publications. Clearly, it is trying to get its foot in the door in the hope of building more content sales. Sounds familiar--Amazon is taking a loss on the Kindle Fire to make headway in the retail business. Stay tuned...
I agree - why buy an e-reader, when a more fully functional tablet can serve that purpose, and much more? It seems like B&Ns nitch may end as a provider of the e-book digital media.
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