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Should Barnes & Noble Spin Off the Nook?

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 {complink 11480|Amazon.com Inc.}'s Kindle Fire. There's also the 800-pound gorilla of the tablet market, {complink 379|Apple Inc.}, 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.

14 comments on “Should Barnes & Noble Spin Off the Nook?

  1. stochastic excursion
    January 9, 2012

    In a market where competition is fierce between full-featured tablets, e-readers–especially the Nook–have a long way to catch up.  The market for printed material is certainly smaller, but the number of retailers has also shrank, and it looks like it's just B&N right now.  

    Barnes and Nobles is better off sticking with its established core operation, leveraging an increasingly niche but longstanding market.  In doing so however it can't afford to ignore the appeal of on-line content, especially periodicals that have successfully established a dual print/on-line presence with internet pay walls.  Amazon and Google books use another approach to sell content on-line, and it looks like this is something that B&N has missed out on completely.

  2. Barbara Jorgensen
    January 9, 2012

    stochastic e: The Journal reports B&N entered the e-books arena in 2003 through an acquisition but abandoned the idea when it didn't take off. I was unaware of that and I find it interesting. Timing isn't everything, but in this case, that call certainly contributed to B&N now playing catch-up

  3. bolaji ojo
    January 9, 2012

    Barnes & Noble may want to spin off the Nook, but what kind of prospect will it have without the parent? The Nook has done fairly well so far because of the linkage with Barnes & Noble. Out there on its own, it will become just another tablet trying to take on Apple's iPad. Amazon's Kindle caught fire because it opens the door to a huge online market for the company's already huge consumer base.

    The Nook won't be able to stand alone without Barnes & Noble, which in turn cannot face a future world of digitized content without its e-reader. Let them stay together, at least until the dust settles.

  4. jbond
    January 10, 2012

    Bolaji, I agree with you completely. Without each other Barnes and Noble and the Nook won't survive. With Borders closing, Barnes and Noble is the only large bookstore chain around. Even with the eventual shift to digital content, I think B&N is better off on its own at the moment.

  5. Eldredge
    January 10, 2012

    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.

  6. Barbara Jorgensen
    January 10, 2012

    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…

  7. bolaji ojo
    January 10, 2012

    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.

  8. t.alex
    January 13, 2012

    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?

  9. Barbara Jorgensen
    January 13, 2012

    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…

  10. SunitaT
    January 14, 2012

    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.

  11. Eldredge
    January 15, 2012

    I still prefer to hold a book also, over reading from a screen, although digital media has some definite advantages.

  12. t.alex
    January 18, 2012

    I think there needs to have some licensing agreement. This is similar to music from iTunes store right?

  13. JADEN
    January 22, 2012

    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?

  14. Anne
    January 22, 2012

    Eldredge,

    I agree with you, there are smartphones that has feature of these e-readers.  I can't spend money on ereader once I can read what I want on my phone.

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