Barnes & Noble Considering Options for Nook

Discussion
Jan 11, 2012

Barnes & Noble said last Thursday that it was weighing spinning off its Nook business. The move would enable B&N to focus more closely on its aging bookstore business and e-commerce operations while capitalizing on the value created in its successful e-book venture. B&N would also escape the significant costs still required to build the Nook brand.

Indeed, Nook investments have fed a string of quarterly losses over the last two years. The nation’s largest bookstore chain also warned last week that it would lose twice as much money this fiscal year ending in April as previously projected, due primarily to a shortfall in the expected sales of Nook Simple Touch, as well as additional investments to grow the Nook business.

Nevertheless, the star this holiday was the Nook, as sales of the e-reader, led by the Nook Tablet, surged 70 percent in the nine weeks ending Dec. 31 vs. the year-ago period driven by third-party distribution beyond B&N.

"We see substantial value in what we’ve built with our Nook business in only two years, and we believe it’s the right time to investigate our options to unlock that value," said William Lynch, Chief Executive Officer of B&N, in a statement.

Online physical product sales declined in the nine-week holiday period, although another bright spot was that physical book sales on a comp basis increased by four percent at B&N stores — the first time in five years — benefiting from the closing of Borders, an increased emphasis on toys, and strength in juvenile titles.

The Nook may be sold entirely or in parts, with B&N maintaining a majority ownership stake.

The potential spinoff led to a heap of scrutiny in the business world. On the positive side, a new investor (Google or Microsoft were widely cited as the lead candidates) could more greatly support the investments required to expand Nook, especially with overseas opportunities just being tapped. While B&N is not cash-strapped, its primary competitors for the Nook — Kindle and iPad — are backed by outrageously capitalized companies.

For B&N stockholders, a spinoff could unearth capital gains with management believing the overall business is significantly undervalued.

On the downside, B&N may lose the favorable treatment publishers have given to the Kindle competitor. Amid positive reviews, Nook has grabbed about a quarter of the U.S. e-book market. "Nook boutiques" have also been established inside stores and any loss of control could impair any leverage gained between the e-reader and book selling side of the business. Said Peter Wahlstrom, a senior analyst with Morningstar Equity Research, to The New York Times, "It is so ingrained with the physical bookselling experience."

Discussion Questions: Do you think Barnes & Noble should spin off its Nook business? What do you see as the pros and cons of separating the businesses?

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16 Comments on "Barnes & Noble Considering Options for Nook"


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Bill Emerson
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Bill Emerson
6 years 6 months ago

The key statistic in this report is that, with their primary 4-wall competitor shuttered, physical book sales only rose 4% comp. That essentially reveals the growth potential for physical books, at least for big box. Rather than continue to work on being competitive in the new technology, management is choosing to cash out. It’s hard to find anything positive about that decision.

At one point, B&N was arguably the best executed brand in the country. It’s sad to see it in this state.

Liz Crawford
Guest
6 years 6 months ago

As Lynch says, it’s time to “unlock the value” of the Nook. I agree it is time to unlock the value — but not by selling the asset.

Instead, Lynch should leverage the Nook to propel B&N into the digital age. If this means acquiring greater marketing and communication savvy with the public, so be it. If it means developing new partnerships, so be it. Focusing on the “old” business of book shops means fastening one’s seat belt on the Titanic.

Matt Schmitt
Guest
6 years 6 months ago

I think the physical store and the Nook must succeed together or fail together. Spinning off the Nook further puts it directly in the tablet wars, without an ecosystem or brick and mortar component to help it differentiate. It’a a tall order for the Nook to compete with the Kindle line, and that much harder without a little help from the store.

David Dorf
Guest
6 years 6 months ago

B&N should spin off the Nook just like Netflix should spin off Quickster. Both are bad ideas. B&N needs the Nook to be relevant in the digital age, and the Nook needs B&N for publisher deals. I don’t see how a possible spin-off looks good to anyone accept the accountants.

David Slavick
Guest
David Slavick
6 years 6 months ago

This from the same company that during the golden age of e-commerce growth decided to “spin off” their website from the stores, and make it a separate operating unit — in order to “optimize/best leverage the asset and increase earnings.” How did that work out?

Spinoff in this case is an antidote for failure. Get tough and grow what you have, leverage your competitive advantage. Or, they’ve figured out they can’t fight this battle as a #3 and are unable or unwilling to get to #1 even though logically having brick and click should be an advantage.

Something is missing here as to why Nook can’t win and be profitable. For someone to buy in or acquire means go for short term capital gain and avoidance of long-term losses due to lack of a vision to get the business to #1. Disappointing.

Adrian Weidmann
Guest
6 years 6 months ago

B&N should be exploring ways to leverage the e-reader market and its Nook customers with more connection to the physical space. We are seeing that traditional ‘brick and mortar’ retail in certain verticals cannot sustain themselves as simply a place to buy stuff. Consumer electronics (Best Buy), office supplies (Office Depot) and bookstores (B&N) are key examples. Being digital goes beyond simply applying technology to traditional business models. Being digital opens new and uncharted opportunities to create and establish innovative business models to connect more personally with your customers.

The store still has a vital role in this digital ecosystem but in ways that require innovative and courageous thinking and leadership. The Nook is nothing but an enabling device. The value and reward to the customer is the imaginative world of content and all of the opportunities that surround creative and valued content.

Max Goldberg
Guest
6 years 6 months ago

Why would management want to focus on an aging, dying business model, rather than embrace the future? Do they feel that in the long run Nook can’t compete with the iPad and Kindle Fire and want to cash out? If their answer is the former, the BN management team should be replaced. If it’s the later, BN management has waved a flag of defeat and is going for a quick buck, in which case they should be replaced.

Kevin Price
Guest
Kevin Price
6 years 6 months ago

As I see it, this is a financing move…a way to get the investment into Nook development (from the outside) in ways it wouldn’t occur if the business is still tethered to an aging bookstore concept no one in their right mind would invest in. I agree that the +4% number is telling. If B&N bookstores are headed toward the inevitable fate of Borders (which would be NO surprise), then why would management wish to see the Nook business dragged down with it?

In short, I see this as a wise move.

John Boccuzzi, Jr.
Guest
John Boccuzzi, Jr.
6 years 6 months ago
Barnes & Noble should be very proud and excited about a 25% market share for e-books. Not a bad position when your competitors are Apple and Amazon. Spinning off the Nook could be a good move with the correct strategic investor like Microsoft or Google. Just a sale to anybody would be a risky move and jeopardize all the hard work they have already put into the project. I heard a story on NPR just before the holidays that talked about the resurgence of small independent books stores. Let’s face it, people still love to browse a book store and turn the pages. Looking ahead, B&N should consider creating mini stores within their larger footprint to help offset the cost of real estate, staff and inventory. Maybe it’s a partnership with Starbucks to open cafes within their stores. What about leasing space to a FedEx Express stores that provide services like shipping, copies and binding? What about adding Redbox machines in the store to drive additional traffic? On the way out they pick up a… Read more »
Roger Saunders
Guest
6 years 6 months ago

One of Barnes & Noble’s major shareholders is John Malone and Liberty Media. When Liberty made its capital investment last spring, it wasn’t for brick & mortar purposes.

Malone, even though he is a book-lover, is shrewd enough to recognize that the value lies in the Nook tablet. This play has to be seen, not as a Barnes & Noble decision, but a Liberty Media decision. Liberty either gets an entity that can be leveraged to the increasing consumer interest in the Nook, and connect their diversified portfolio, or, they are positioned to champion the sale of the platform to a tech company.

If the former, Barnes & Noble will continue to have support in keeping the box whole. If the later, look for a slightly smaller footprint, but not the demise of a quality, large-scale book retailer.

Ed Rosenbaum
Guest
6 years 6 months ago

I am confused. Have we gone backward here by focusing on the past and not the future? It seems B&N should focus on how to make both succeed, and not by spinning off the one with the better potential to focus on the past model. Brick and mortar book sellers need to focus on smaller footprints and more e-commerce.

Ed Dennis
Guest
Ed Dennis
6 years 6 months ago

This would seem to be an admission of failure. The Nook is dead! Long live the Kindle! B&N would do well to concentrate its efforts on stores that are currently successful, close stores that are draining the system, and work on a smaller footprint that delivers what a connected consumer will be looking for in 2020. Retail has changed but book sellers can still be successful. Maybe consider getting out of malls and into neighborhoods. Team up with players like Panera to create a new experience for the consumer.

James Tenser
Guest
6 years 6 months ago
De-coupling Nook could be a pretty smart move for Barnes & Noble, from both a strategic and financial perspective. I believe it would free Nook to find its own market value, while the core B&N business would retain ties to Nook as a semi-captive distribution channel for virtual merchandise. Critics should consider that this option goes way beyond optimizing the B&N book business. Nook is a broad-based content platform that also delivers periodicals, music and video — so far. It is already deep in the tablet fray, and its market share suggests that not everybody loves iPad or Kindle so much. Meanwhile, large-format bookstores continue to work on refining their role as a “third place” where customers can enjoy sipping coffee, hanging out, browsing the merchandise, etc. There’s an undeniable role there for in-store “Nook nooks” — and these might also perform superbly in thousands of Walmarts, Starbucks, transit hubs and shopping malls. Barnes & Noble is the sole survivor among the large bookstore chains for good reason — it has been the most nimble… Read more »
Jerome Schindler
Guest
6 years 6 months ago

Brick & Mortar B&N and Nook seem like a marriage made in heaven — unless they think that the Nook line cannot compete with Amazon’s offerings. The single most important reason I picked the Nook over the Fire is that if necessary I can go to the B&N store and get help. I can’t help but think this is a short-sighted focus on quarterly earnings.

M. Jericho Banks PhD
Guest
M. Jericho Banks PhD
6 years 6 months ago

A valuable B&N niche is their Nook. It’s their Nook niche, and it says so right there in the article generating these RetailWire comments. Why would they back away from it?

For a few months, now, ZDNet and C/Net have been predicting a shake-out in the handheld digital hardware market. Phones and tablets. Their take is that software will become more important as the strongest hardware suppliers survive and the weaker ones fall away.

Stay the course, B&N!

Bill Hanifin
Guest
6 years 6 months ago

On the surface, the question here might evoke a response that selling the Nook business makes sense as it is a tall task to compete with Amazon, Apple and even makers of notebooks in this space.

Reading, however, that Nook has grabbed about a quarter of the U.S. e-book market, the answer has to be considered more carefully.

Using the old razor blade example, I wonder if B&N should further reduce the Nook price, even effectively giving them away by packaging coupons and future discounts on e-book purchases, in order to capture future book purchases from customers.

Viewing the Nook as a “hook” for B&N sales might yield better results than seeing it as a standalone business.

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