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Can NOOK find a digital niche for Barnes & Noble?

Stuart Lauchlan Profile picture for user slauchlan December 11, 2014

NOOK has struggled to make headway against competition from the Kindle.
Microsoft's cut its losses and bailed out of its NOOK partnership.
The challenge for Barnes & Noble is how to kick-start a product offering that's been  in decline from its launch.

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Is Santa bringing you an e-reader this Christmas? Well, clearly it depends on whether you’ve been naughty or nice of course, but the chances are that if such a thing was on your letter to Santa then you probably spelt it K-I-N-D-L-E and not N-O-O-K.

Which is an ongoing problem for Barnes & Noble which has seen its NOOK reader start from behind against Amazon’s Kindle and essentially go from bad to worse over the past 5 years.

According to last week’s quarterly numbers, NOOK revenues fell 41.3% to $63.9 million. Device and accessories sales declined 63.7% to $19 million on lower unit selling volume and digital content sales declined 21.2% to $45 million, also on lower unit volumes.

The quarterly figures announcement was bookended by the abrupt termination of a partnership with Microsoft which invested $300 million in NOOK in 2012 in exchange for a 17.6% stake in the firm.

When it bailed out last week, Microsoft had taken a $175 million hit on its investment, small potatoes perhaps in the wider Windows-verse, but indicative of how keen the firm is to get out.

In a statement, Microsoft said:

As the respective business strategies of each company evolved, we mutually agreed that it made sense to terminate the agreement.

While news of the break-up took Wall Street by surprise, the split had been a long time in coming. Microsoft removed the NOOK app from Windows 8 devices earlier this year in favor of developing its own reading application, while Barnes & Noble began selling the Samsung Galaxy Tab 4 NOOK devices in the second quarter.

That should theoretically have been in plenty of time for Barnes & Noble to ride the ‘Black Friday’ frenzy, but in the event that didn’t work out. CEO MIchael Huseby admits:

The sales over the last week or so, Black Friday, weren't quite up at our expectations. Having said that, no one is pushing any kind of a 'red alert' button at this point in time because we have the whole holiday, Christmas, all of December just about left.

He adds:

The Samsung devices have been out there for three months. They've been fantastic to work with. We're working together very, very closely and trying to manage demand, pricing, etc.

We're really happy to have Samsung as our partner. We think they are great devices. We think we're pricing them right.

I think the difference from what we were doing in prior years is that we do have this relationship with Samsung and we can work closely with them to manage the demand and the inventory levels so that we don't have that kind of financial exposure going forward.

Apart from Samsung

OK, so Barnes & Noble’s betting the bookshop on Samsung rather than Microsoft. But is that enough to reverse NOOK’s poor performance to date? Huseby inevitably remains upbeat:

There's obviously a lower demand for tablet devices in general in the market given the saturation so to speak of tablets, but we believe it's important that we can offer an e-reading experience both in the form of color and the 7-inch and 10-inch device are both great devices and great values, and we'll continue to do that.

The competition

There are other initiatives underway to try to kick-start the market,including a partnership with OverDrive, an e-book platform for libraries, to provide library patrons access to hundreds of the most popular digital magazines and newspapers through NOOK on a device or an app.

Huseby also points to B&N Sync Up!, which he pitches as:

a new in-store holiday program that brings physical and digital books together in a new and exciting way for book lovers and gift-givers. This program enables customers to discover and browse for books across both formats in our stores.

Through the holiday season, customers shopping in our stores can purchase paperbacks from especially curated selection and get the NOOK book digital edition of the same title for just $4.99. The Sync Up! program offers customers the convenience of owning both print and digital format of a great book at a great value, with the benefit of being able to easily gift one or both of the versions to a friend or family member for the holidays.

But it’s clear that for all the confident words, the CEO is conscious that the firm faces a very steep uphill climb:

While NOOK digital will continue to challenge us to stabilize and reverse the decline in digital content sales, our NOOK team is working hard to accomplish this and also is continuing to innovate and improve the digital reading experience we offer.

Interestingly, even as it consigns its Microsoft alliance to history and talks up its 'BFF' Samsung, Barnes & Noble seems to be contemplating looking around for other partners to boost its prospects. Huseby is careful not to turn to the last chapter on this subject, but admits:

Yes, there are ongoing conversations. No, there are no deals yet to discuss with any outside partner on NOOK, but yes, there are ongoing conversations.

The point is that there are others outside of our organization to see substantial value in NOOK in the form of its content library, NOOK Press, the talent we have in Santa Clara and our people, and the innovation and some of the things they are doing that we're not prepared to discuss publicly but we have shared with others.

My take

Too little, too late. It's time for some more radical thinking if Barnes & Noble wants a long term future.

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