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Amelia Kaufman/MEDILL

Barnes & Noble redirects Nook’s future toward digital textbook after dismal holiday sales

Outlook dims for Barnes & Noble as Nook fights for niche

by Amelia Kaufman
Feb 20, 2013

Barnes & Noble Inc.’s once innovative e-reader has fallen from grace.

The New-York-based company had banked on the Nook e-reader carrying it through to the digital age as the book industry crumbled around it. But the Nook, heralded as a technological savior of literature, hangs in limbo less than three years after its release.

That’s where the Nook remains now: Caught between the cloud-storage capabilities of the Amazon Inc. Kindle and the unwavering following of Apple Inc.’s iPad. Barnes & Noble is counting on a recent partnership with an education publishing company to help establish Barnes & Noble as a digital textbook magnate.

But poor sales may cause the Nook’s short-lived life to be prematurely snuffed out. William Lynch, chief executive of Barnes & Noble, is grappling for a way to explain dismal 2012 holiday sales: Nook revenue declined 12.6 percent.

“We entered the holiday with two great new products, Nook HD and Nook HD+, both highly rated media tables of phenomenal quality. Nook device sales got off to a good start over the Black Friday period, but then fell short of expectations for the balance of holiday. We are examining the root cause,” Lynch said in is a statement.

It seemed like a dream come true for readers when the 7.5 ounce gadget debuted in 2009. Even the Christian Science Monitor pledged allegiance: “All hail Barnes and Noble Nook, king of the e-reader heap.” Consumer Reports touted its streamlined focus on “just reading” and others raved about the simplicity of the model.

But last week Barnes & Noble management announced that Nook revenue losses for 2013 would be greater than in 2012 with Nook Media revenues to be less than $3 billion – a black cloud that has caused shares to fall 11 percent in the past five days.

Now, the monochrome screens and elementary browsers of the Nook Simple Touch seem dated and the Nook HD, despite its progressive graphics, may have joined the game too late: The Nook HD was released in late 2012 while the iPad made its debut in early 2010.

After edging out Borders Group Inc. and swallowing its customer base, Barnes & Noble looked to its e-reader subsidiary to carry it through the recession but hasn’t proven it has what it takes, as it touted in its welcome letter to Border’s customers, “to be your bookstore.”

A partnership with Microsoft Corp. in October 2012 to “advance world class digital reading experience” has not done much to increase Nook sales. The deal came with a $300 million investment in the Nook, giving Microsoft a 16.8 percent stake.

In a latest effort to save the floundering e-reader, Pearson Plc, a leading textbook company, has also made a $189.5 million investment in the Nook – giving the company a 5 percent equity stake – and the option to purchase 5 percent more.

The deal with Pearson made sense for Barnes & Noble, which has shown interest in moving towards the digital education market, commented Alan Rifkin, an analyst for Barclays Bank PLC, in a Dec. 28 note. It still does bring about some concerns concerning the stability of the company, he said.

“We view the more recent agreement as another step in Barnes & Noble’s need to sell off additional parts of its Nook business in order to continue to fund the necessary Nook research and development,” Rifkin said.

Rifkin however, remains skeptical about the future of the Nook.

“Going forward, we continue to believe that the Nook will have difficulty competing with the likes of Apple, Amazon, and Google, all which have more diversified product portfolios and stronger balance sheets to compete in the capital intensive product development cycle.”

Barnes & Noble reported Jan. 3 that its Nook segment revenues –comprised of readers, digital content and accessories – decreased 12.6 percent in the nine-week holiday season to $311 million from the year ago period. Sales of digital content, however, increased by 13.1 percent.

In 2009, Barnes & Noble was forced into the digital age by the quick rise of the Kindle and iPad.

“A company in a turbulent industry often seems like a dairy farmer whose herd has been reduced to just one cow, whose only adaptation of his business plan is to milk that heifer extra-hard,” Stephen Wunker blogged for the Harvard Business Review in 2011 regarding Barnes & Noble. That’s what Barnes & Noble did.

Despite an industry-wide book sales decline of 2.5 percent that year, the company’s e-book department experienced a momentous growth of 150 percent.

Wunker also highlighted the revolutionary outlook of the company; applauding its attempts to try new formulas and adjusting “its approaches based on careful listening to marketplace reactions.”

Skip ahead to 2013: Warnings about this year’s losses have already come twice from Barnes & Noble management. Barclay analyst Rifkin projects three-year cumulative Nook losses to reach $729 million despite the diversification of their product line.

The company attributed such declines in sales to lower unit volume and average selling prices. Bloomberg LP reported sales from stores and the company’s website also suffered, sinking 11 percent to $1.2 billion.

Randy Hlavac, CEO of Marketing Synergy Inc. and a Medill Integrated Marketing Communications professor, said the Nook’s decline is understandable when you consider the technologies driving the competing products.

“The Nook was caught between two worlds. It didn’t have a cloud based system to make it cheap and it didn’t have the economics of scale the iPad and other – more complete – systems had,” Hlavac said.

On top of declining Nook sales, CEO Mitchell Klipper in late January commented in an interview with the Wall Street Journal that the company was looking to shutter a third of its stores. The company still operates 689 stores, not including college bookstores, in all 50 states and the District of Columbia.

Up until 2009 the company was opening on average 30 stores a year, according to the Journal. Over the next 10 years, the company plans to pack up stores at a rate of 20 per year until numbers settle at 450 to 500, the Journal reported.

While Barnes & Noble concedes the numbers reported by the Wall Street Journal are consistent with analysts’ expectations, “Barnes & Noble has not adjusted its store closing plan whatsoever,” said Mary Ellen Keating, a spokeswoman for Barnes & Noble. “The wall Street Journal article implies that our rate of store closing has changed. We have historically closed approximately 15 stores per year for the past 10 years.”

Today, the company’s price-earnings ratio is non-existent as the company is generating losses while S&P 500 PE ratio reached $17.34. With a 52-week low of $10.45 and a high of $26, the stock closed on Tuesday at $13.14. Since the year ago period, company shares have risen 11.8 percent – not quite meeting the 14.2 percent increase in the S&P 500 Index.

Mark Tatge, chief executive of Deadline Reporter LLC, sees one bright spot.

“The Nook is really the only exciting thing about Barnes & Noble,” said Tatge. “I think the fact that Pearson has money [in the Nook] that it’s going to evolve. I don’t think it is going to continue to decline…. It has a niche, it has a following – it might just end up becoming a textbook reader.”