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.
The Nook did pretty well by B&N's standards. According to The Wall Street Journal:
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.