The largest book chain in the United States warned that its
losses in the third quarter on sales of e-books and devices would be
far greater than the year before.
Even from a company with a lot of bad news lately, the bulletin
from Barnes & Noble this month had an ominous feel.
Barnes & Noble, the largest book chain in the United States,
warned that when it reported 2013 fiscal results for the third
quarter Thursday, losses in its Nook Media division -- which
includes sales of e-books and devices -- would be greater than the
year before and that the unit's revenue for all of fiscal 2013 would
be far below projections it had given of $3 billion.
The problem was not so much the extent of the losses, but what
the losses might signal: that the digital approach Barnes & Nobles
has been heavily investing in as its future for the past several
years has essentially run its course.
A person familiar with Barnes & Nobles's strategy acknowledged
that this quarter, which includes holiday sales, has caused
executives to realize that the company must move away from its
program to engineer and build its own devices and to 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 had asked not to be
identified discussing corporate strategy.
On Thursday, 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 J. Lynch Jr., the company's chief executive, said
during 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 5 percent stake in the
unit for nearly $90 million.
Going into the 2012 Christmas season, the Nook HD, Barnes &
Noble's entrant into the 7-inch and 9-inch (18-centimeter and 23-
centimeter) 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 the New York Times technology
columnist David Pogue told readers that 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 strongly preferred Apple
devices 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 those of its rivals. "It
is a very tough space, said Shaw Wu, a senior analyst at Sterne
Agee, a midsize investment bank in San Francisco. "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, which
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 had used to have
numerous competitors, it now had only two companies that were 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
about 675 stores in the United States. The company has said it plans
to close about 15 unprofitable stores a year and to replace them at
a much slower rate. It also still holds about 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."
