Barnes & Noble takes a hard look at the Nook

February 25, 2013 11:58 AM

Barnes & Noble Inc. founder and chairman Leonard Riggio plans to make an offer for the bookseller’s retail business, which includes its stores and e-commerce site, the retailer announced today. Barnes & Noble says it was informed of Riggio’s pending proposal today. The proposal does not include Nook Media LLC, the digital content unit formed last year in a partnership with Microsoft Corp. that publisher Pearson PLC later joined.

If approved, Riggio’s proposal would separate Barnes & Noble’s digital reader and content business from its retail operations. Barnes & Noble says it has formed a committee of three directors to evaluate any proposed transactions, but has set no deadline for when it would announce a decision on Riggio’s proposal.

This is not the first time Barnes & Noble has considered a sale. In 2010, the company formed a committee to evaluate strategic options, including a sale. Riggio, who is Barnes & Noble’s largest shareholder, said at that time he might consider buying the company, but he did not make a formal offer. Ultimately, the review elicited a buyout offer that was later dropped by Liberty Media Corp. Instead, Liberty Media invested $204 million into Barnes & Noble.

Riggio’s plan to separate the bookseller’s physical and online stores from the Nook business would represent a significant shift in strategy for the retailer.

In 2012, Barnes & Noble CEO William Lynch called the Nook integral to the company’s plan to transform itself. “We are out to change the future of reading today,” Lynch, the company’s former e-commerce director, told attendees at the Internet Retailer Conference & Exhibition 2012. In addition to developing its Nook devices, Barnes & Noble also re-outfitted its stores with bigger Nook areas that let readers use various Nook devices to browse and thumb through digital books at their leisure—just as they would with a physical book.

Separating the Nook from the stores may be tough for Barnes & Noble, says Nikki Baird, managing partner of research and advisory firm Retail Systems Research. “I don't know how Barnes & Noble can compete without the Nook,” Baird says.  “When they first announced the strategy, I thought it was a brilliant way to compete with Amazon and Kindle. E-book buyers are the most voracious book buyers, and there is no way that Barnes & Noble can compete for that slice of the market without an e-reader of their own. It's not like they can sell e-books on Amazon.”

And the space devoted to Nook devices inside Barnes & Noble stores says something about the business of selling printed volumes, Baird says. “When I look at how much floor space has now been dedicated to Nook in Barnes & Noble stores, I just wonder how profitable stores really are these days,” she says.

However, Riggio’s move may reflect his concern about how profitable the Nook will be when competing against competing e-book readers like Amazon’s Kindle and Apple Inc.’s iPad tablets, including the iPad mini, which is similar in size to e-book readers.

The Nook did not fare well against its competitors during the recent holiday season sales. Barnes & Noble says sales of its tablets, e-readers, digital content and accessories, decreased 12.6%, to $311 million, in the nine-week period ending Dec. 29 compared with the same period a year earlier. That was a steeper decline than the retailer reported for its retail segment, which includes physical stores and, its e-commerce site. Retail segment sales during the holiday period totaled $1.2 billion, down 10.9% compared with the same period in 2011. Barnes & Noble is scheduled to announce its third quarter results Thursday.

The sharper drop-off in digital sales reversed the trend of the first six months of Barnes & Noble’s current fiscal year. Through its fiscal second quarter ending Oct. 27, Barnes & Noble, No. 32 in the Internet Retailer Top 500 guide, said sales of Nook e-readers and tablets and the digital content consumers read on them increased 2.6% to $352.3 million from $343.3 million a year earlier. That compared with a 0.38 % decrease in retail sales to $2.115 billion from $2.123 billion.

The question for Baird is how does Barnes & Noble compete against Inc., No. 1 in the Top 500, and its Prime free shipping and entertainment service. “The problem I see with the Nook strategy is that it’s not Amazon Prime, and that’s the real differentiator for Amazon when it comes to e-books,” Baird says. “As a Prime member, you have access to literally thousands and thousands of books that you can ‘borrow’ for free.”  Consumers who subscribe to Prime and also own an Amazon Kindle e-reader or Kindle Fire tablet computer can borrow e-books to read on those devices as part of their Prime membership.

Barnes & Noble has invested heavily in its Nook product since launching the first e-reader in 2009. Most recently it formed Nook Media in 2012 with a $300 million investment from Microsoft Corp. Later in the year, UK-based Pearson invested $89.5 million with a focus on expanding higher education e-book content.

Barnes & Noble went public in 1993 at $10 per share. Earlier today, its stock traded at $15.10, an 11.8% increase from Friday’s close of $13.51.




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