Even for a company with a lot of bad news lately, the bulletin from Barnes & Noble this month had an ominous feel. The nation’s largest book chain warned that, when it reports its fiscal 2013 third-quarter results, losses in its Nook Media division— which includes sales of e-books and devices— will be greater than the year before, and that the unit’s revenue for all of fiscal 2013 would be far below projections it gave of three billion dollars.
The problem was not so much the extent of the losses, but what the losses might signal: that the digital approach that Barnes & Nobles has been heavily investing in as its future for the last several years has essentially run its course.
A person familiar with Barnes & Nobles’ strategy acknowledged that this quarter, which includes holiday sales, has caused executives to realize the company must move away from its program to engineer and build its own devices and focus more on licensing its content to other device makers. “They are not completely getting out of the hardware business, but they are going to lean a lot more on the comprehensive digital catalog of content,” said this person, who asked not to be identified discussing corporate strategy. The person said the company will emphasize its commitment to intensify partnerships with other tablet producers like Microsoft and Samsung to make deals for content that it controls.
If Barnes & Noble does indeed pull back from building tablets, it would be a 180-degree shift for a company that as late as last year was promoting the Nook as its future. “Had we not launched devices and spent the money we invested in the Nook, investors and analysts would have said, ’Barnes & Noble is crazy, and they’re going to go away’,” William Lynch, the company’s chief executive, said in an interview last January.
Since 2009, when Barnes & Noble first decided to invest in building the device, its financial commitment to the division has been substantial. (The company does not disclose exact figures.) At the beginning of 2012, that bet seemed to be paying off and the digital future seemed hopeful.
In May, Microsoft decided to give a cash infusion to the product by pledging more than $600 million to Nook Media. In December, the British textbook publisher Pearson bought a five percent stake in the unit for nearly $90 million.
Going into the 2012 Christmas season, the Nook HD, Barnes & Noble’s entrant into the seven-inch and nine-inch tablet market, was winning rave reviews from technology critics who praised its high-quality screen. Editors at CNET called it “a fantastic tablet value”, and David Pogue in The New York Times told readers choosing between the Nook HD and Kindle Fire that the Nook “is the one to get”.
But, while tablet sales exploded over the Christmas season, Barnes & Noble was not a beneficiary. Buyers preferred Apple devices by a long mile, but then went on to buy Samsung, Amazon, and Google products before those of Barnes & Noble, according to market analysis by Forrester Research. “In many ways, it is a great product,” Sarah Rotman Epps, a senior analyst at Forrester, said of the Nook tablet. “It was a failure of brand, not product. The Barnes & Noble brand is just very small,” she added. “It has done a great job at engaging its existing customers, but failed to expand their footprint beyond that.”
Others pointed out that, even if the Nook itself was a nice device, its offerings were not as rich as that of its rivals. Shaw Wu, a senior analyst at Sterne Agee, a midsize investment bank in San Francisco, said: “It is a very tough space. It is highly competitive, and extras like the depth of apps are very important. But it requires funding and a lot of attention, and Barnes & Noble is competing against companies like Apple and Google, who literally have unlimited resources.”
Horace Dediu, an independent analyst based in Finland who focuses on the mobile industry, said that the difference in quality among the products was so small as to be increasingly irrelevant. “We’ve moved beyond a game of specs,” he said. “Now it is about your business model, about distribution, and economics of scale.” He said that, while the cellphone business used to have numerous competitors, it now has only two companies that are really profitable: Apple and Samsung. He said he expected a similar consolidation in the tablet market, with companies like Barnes & Noble “maybe falling off the map”.
There is no immediate danger to the book retailer, which has some 677 stores nationwide. The company has said it plans to close about fifteen unprofitable stores a year and replace them at a much slower rate. It also still holds roughly one quarter of the digital sales of books and more of magazines.
Still, the threat is large enough that Barnes & Noble executives are working hard to determine a strategy that focuses on core strengths like content distribution. Its content is its “crown jewel”, said the person familiar with the company’s strategy, “and where the profitable income stream lies.”
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