Barnes & Noble is to stop making its Nook tablets, in a move which could hasten the break-up of the company. The move partly reflects the disappointing results of its relationship with Microsoft so far. When the Windows giant invested in the bookseller’s digital unit last year, it was expected to result in the Nook platform being converted to Windows and becoming part of Microsoft’s device strategy. Instead, that strategy was centered on the homegrown Surface range, and B&N was left with an attractive product which, nevertheless, lacked the scale and differentiation to take on the big names in the crowded Android tablet space. However, relieved of tablet manufacturing costs and the challenges of competing head-on with the iPad, Nook Digital may have become an easier target for acquisition ‘ perhaps even by Microsoft itself, as it continues to develop its own content and device platform.
The US firm will still offer the Nook ereader models and will seek a ‘partnership model’ for the tablets, although most expect them to disappear quietly after this year. The survival of the ereaders reflects the increasing tendency for vendors to sell devices which are tightly integrated with their own content and services, but with the rise of tablets, ereaders have become a fairly specialized niche targeted at avid readers and students. Researchers at IHS iSuppli predict that ereader sales will fall by 27% this year, after a similar decline in 2012, shipping fewer than 11m units in 2013. With prices dropping dramatically, the devices are not a viable business in their own right – it is vital that they generate additional content sales for the supplier, as Kindle does for Amazon.
There is some indication of that at B&N. On the analyst call, CEO William Lynch said that ‘the majority of the content sales come from non-tablets’ and that ereaders were the ‘primary customer acquisition vehicle for content’. For that reason, he said: ‘We plan to continue to innovate in the single purpose black-and-white ereader category. The underpinning of our strategy remains the same today as it has since we first entered the digital market, which is to offer customers any digital book, magazine or newspaper, on any device.’
But there’s the rub. That is a goal shared with Amazon. In everything it does, from its physical book sales to its tablets, B&N is up against the might of the Seattle etailer, which has succeeded in doing what B&N visualized but could not deliver, building on its initial ebook user experience, purchasing system and brand, to create an increasingly fully-fledged online media platform, with multiple stores and devices united by one cloud-based engine and Amazon’s own UI.
Amazon has, so far at least, faced the key dilemma of digital content ‘ whether to distributed as widely as possible or confine it to an optimized experience on one’s own devices ‘ more effectively than many rivals. Google has moved from a all-devices strategy to try to prioritize its own Nexus products, but this has been an uneasy balance, while Amazon manages to deliver the leading ebook and other content apps not only on Kindle but even, sometimes, on Apple products. B&N will now have an oddly mixed approach, with an optimized ebook offering, but clinging to its dream of expanding into other types of content, which it will deliver as widely as possible.
‘We’ve been very focused here for the last three years on devices, and we realize we have to shift our focus to distributing the content more aggressively through other platforms,’ said CFO Michael Huseby.
B&N, confined to one country, and lacking its rival’s deep pockets or secretive Lab126 R&D unit, has tried many approaches to carving out a profitable business in digital content. But it has suffered large losses in the Nook business, which were seen, in its full year earnings report on Tuesday, to have dragged down its revenues severely.
Fourth quarter revenues were down 7.4% year-on-year to $1.3bn, with a net loss of $118.6m, while for the full year, revenues fell 4.1% to $6.8bn with losses of $154.8m (sharply up from the year-ago figure of $65.6m). Nook was a major contributor to the poor results, with its revenues down 34% to $108m for Q4, and down 16.8% for the full year, to $776m.
‘Device sales declined during the fourth quarter due to lower selling volume,’ the company said. ‘Digital content sales increased by 16.2% for the full year. However, they decreased 8.9% for the fourth quarter.’ The Q4 drop was attributed to the device sales shortfall, and also the lack of the big hit books B&N offered a year earlier, including The Hunger Games and Fifty Shades of Grey trilogies.
Nook pre-tax losses were $177m in the fourth quarter, a figure which included an additional $133m of inventory charges as the firm adopted aggressive promotional strategies. For the year, Nook EBITDA losses were $475m, driven by inventory related charges totalling $222m. It will now look for manufacturing partners to co-brand the tablets and take the cost of making them off its shoulders. Lynch would not enlarge on the details of the partnerships but said: ‘We want to move away from taking on all that risk ourselves’ in a sub-8′ tablet segment which has become ‘extremely competitive and very capital intensive’.
The change of strategy will certainly have been heavily influenced by the uncertain relationship with Microsoft. The lack of significant results from that alliance ‘ beyond the welcome financial investment ‘ have frustrated some investors and B&N may well be responding to the dashing of hopes of a major tablet deal with its shareholder.
However, there is also the possibility that Microsoft itself will be the co-branding partner B&N seeks for Nook (along with its Surface manufacturers to improve the tablet’s cost base). There were reports last week that the Windows giant was interested in buying the Nook and College business units, in which it has stakes, outright, though the rumored figure, $1bn, would no doubt be beaten down considerably after the latest set of financials. Its primary interest would be to incorporate the digital content, which B&N continues to develop despite the renewed focus just on books and magazines, in its own growing platform to drive the Surface range. Microsoft has been widely expected to debut a small-sized Surface later this year, and that could also be based around Nook.
In any event, the latest developments could make the Nook unit an easier acquisition target now, since it has a very specific focus on ereaders and on content, without a buyer having to take on the burden of tablet manufacturing costs and, in particular, the contest with slate rivals like Apple. The sale of Nook could, in turn, smooth the path for founder and lead shareholder Leonard Riggio to go ahead with his February proposal to buy B&N’s retail bookstore arm. That plan would leave Nook Media as a public company, but a very weak one, so a white knight would be extremely welcome at this stage. ‘It would be much easier to separate the businesses if Nook was doing better,’ analysts told Bloomberg.
For now, B&N says Nook Media will improve its financial fortunes anyway, thanks to the lower cost base from ceasing tablet production, the sale of current Nook inventory, and Microsoft’s pledged cash payments, totalling $305m over five years.