The e-reader business may be moving faster in the last six months than it did in the previous six years. Even Barnes & Noble, the brick-and-mortar book retailer that's best managed the transition to digital reading, has been taken by surprise.
Now the company has to reread, restock and re-sort its own future — possibly one where the B&N and the Nook go separate ways.
A separate Nook business may be able to attract new investment and partnerships and innovate more quicklyIn a press release Thursday, CEO William Lynch announced that the company is beginning "strategic exploratory work to separate the Nook business."
“We see substantial value in what we’ve built with our NOOK business in only two years," Lynch says, "and we believe it’s the right time to investigate our options to unlock that value."
The brand-new Nook Tablet, for example, has been a great success. It's already the company's fastest-selling device and outperformed expectations over the holidays, even though it faced stiff competition from Amazon's Kindle Fire. Driven by the $250 Nook Tablet and its older sister device, the $200 Nook Color, Lynch says Nook will do $1.5 billion in sales this fiscal year and continue growing into 2012 and beyond.
So what's the problem? Even though Nook set records, and overall retail sales for the holidays were up, sales of the Nook Simple Touch e-reader were disappointing. A price cut from $140 to $100 to match the new Kindle Touch couldn't give the six-month-old Touch enough of a boost going into the holidays. B&N doesn't release raw sales numbers of individual units, but whatever they were, they weren't enough to meet the company's expectations.
The good news, as Lynch notes, is that consumers appear to prefer color e-readers, validating the strategy B&N introduced in 2010 with the Nook Color.
The bad news is that the company has had to radically revise its earnings projections. Initially, B&N projected earnings before taxes, interest, depreciation and amortization (EBTIDA) of $210 million to $250 million. In December, the guidance offered was at "the lower end" of that figure. Now the company has revised its expectations again, to just $150 to $180 million. So after taxes and other non-operating expenses, B&N will most likely lose quite a bit of money, somewhere between $1.10 to $1.40 per share.
The drop in demand for the Nook Simple Touch and the cost of advertising the other Nook devices takes most of the blame for the drop in expected profit.
The timing couldn't be worse. The company's already looking to sell Sterling Publishing, the in-house book publisher that it acquired in 2003 and consolidated in 2009. The growth of the brick-and-mortar retail business is slowing, even though the economy has picked up a bit and the stores now sell more high-profit items like toys and electronics. BN.com (which includes both e-books and web sales of books and other goods) is still the smallest segment of B&N's business. It's much smaller than the retail or college divisions, and it still loses money — almost $59 million in Q2 [PDF].
Meanwhile, the e-reader business is growing, but is also undergoing tectonic shifts in pricing, form factors, content types and reader expectations. It doesn't matter that Nook anticipated and helped precipitate many of these changes. They make the business unpredictable.
For the most part, bookstores and their investors do not like unpredictability. If they did, they'd be venture capitalists. They also don't have years to wait. Nobody wants to be propping up the next Borders while the next big thing is always just around the corner.
Barnes & Noble has scooped itself out of Borders' fate before. How do they do it again? And what does all of this mean for the still-developing e-book and e-reader industry?
Continue reading 'Barnes & Noble Aims to Separate Nook Biz With An Eye for Global Markets' ...
At a minimum, Barnes & Noble will restructure itself internally. They will most likely turn the Nook business into a separate, fourth operating segment, alongside non-Nook retail, its college bookstores, and BN.com. This will happen by the end of the fiscal year. That much is said directly in the press release.
That only transforms the accounting. It might make some transparency-minded investors and reporters happy by giving them a clearer idea of where the business is going. It might help internally justify tough decisions like store closings or layoffs. But it doesn't really affect the business itself.
A more radical, longer-term transformation — and this is what the press release suggests is being considered — would be to spin off Nook as a separate company, with Barnes & Noble retaining sole or joint ownership.
Now, this isn't Netflix/Qwikster, where there was at least a case on paper that separation alone could solve some problems. Running Nook as a wholly-owned subsidiary of Barnes & Noble doesn't net the benefits that joint ownership would. A spinoff would create a dedicated vehicle for continued investment in Nook and the Nook platform.
"This is about requiring sustained investment in the Nook business to grow and expand internationally," Forrester analyst Sarah Rotman Epps told Wired. "A separate Nook business may be able to attract new investment and partnerships and innovate more quickly."
Essentially, this is how Kobo was created in 2010. Canada retail chain Indigo Books & Music took its Shortcovers e-book division, added equity investment and retail partnerships with booksellers Borders in the US and REDgroup in Australia/New Zealand, plus an infusion of cash from Cheung Kong holdings, and created a genuinely international e-book and e-reader company.
Unfortunately, Borders and REDgroup quickly fell apart, and shortly after Kobo teamed up with UK bookseller W H Smith, Kobo was bought outright by Japanese retailer Rakuten for upwards of $300 million. Barnes & Noble has to hope they can avoid that particular fate.
Still, international expansion is the real growth opportunity in the e-reader industry. There have been hints and rumors for months that Barnes & Noble is pursuing a partnership with Waterstone's to sell Nook devices in the UK sometime in 2012 — some not so subtle.
In December, Barnes & Noble VP Theresa Horner was asked specifically about Waterstone's entry into e-books. "I think B&N would say that having a chain of book stores is a great asset for selling book products," Horner said, "and if you think creatively about selling content, there is an endless well of possibilities for doing that." Barnes & Noble's formula for customer support, publisher relationships and self-published content mapped perfectly onto Waterstone's situation.
As for what W H Smith was doing with Kobo? Horner said she hadn't had a chance to pop into a W H Smith while she was in the UK. Message received.
A company like Waterstone's will probably want more than a skim off the top of in-store Nook sales. They'd want an investment in and some direction over the future of the platform. Creating a separate company devoted to international e-reading, with investment from Waterstone's, other bookstores, and investors looking to cash in on the e-reader boom may be how that partnership happens.
That's the spinoff scenario. At the very limit, Barnes & Noble pursues an outright sale of Nook. Precisely because of how deeply B&N have integrated their retail business with the Nook, I don't see this happening unless the company is really and truly desperate.
Forrester's Rotman Epps agrees. "Nook's success has been built on the leverage of Barnes & Noble's retail stores, and B&N's same-store physical book sales INCREASED for the first time in years due to Nook traffic," she says. You can't maintain that highly-touted synergy without at least some control over the digital product.
But, Rotman Epps adds, "it also could be that Barnes & Noble's physical book business is dying faster than they expected, and they want to get value out of selling Nook while they still can." It all depends on how you read those retail sales numbers — something the company may be able to determine when they complete their review later in 2012.
As a final note, what do Barnes & Noble's Nook numbers tell us about broader trends in the e-reader market? At the end of 2011, there was suddenly a glut of highly capable, relatively inexpensive, touchscreen E Ink readers. Amazon, Kobo, and B&N all released models below the magic $100 number.
Barnes & Noble and other companies were betting that this would produce a surge of demand for these devices. To a certain extent, it probably did — but the presence of even more versatile color tablets at $200-$250 sucked a great deal of that demand away.
The Kindle Fire didn't seem to hurt the Nook tablets nearly as much as anyone expected. Taken together, along with the even-cheaper Kindle 4, they probably hurt the Nook Simple Touch.
This suggests that despite the charms of E Ink for long-form reading, there is a limit to how quickly that market can grow, at least domestically. That limit is not bound by price, but by interest. And right now, tablets and other color devices, which are also quickly dropping in price, are attracting the most interest.
Devices that play games, browse the web, show off photos, or check e-mail, whatever their screen size, have a practical appeal that goes beyond their ability to do a very particular kind of reading. Yet we trust companies known for media and retail, like Barnes & Noble and Amazon, to produce these devices more than we do traditional consumer electronics companies like Sony, Samsung or Panasonic. That's fascinating.
Even Rakuten, the company who bought Kobo, doesn't see the future of its devices in books alone. "An e-book reader will ultimately not be only about selling books," Rakuten's Pierre Kosciusko-Morizet told the BBC in November. "It's about potentially selling other digital goods, and it's also about being in consumers' homes with a hardware device."
That was Amazon's retail-minded twist on Barnes & Noble's "reader's tablet." It was a lesson Amazon learned from the first and best: Apple.
Whatever Apple may or may not be announcing at the rumored iBooks event at the end of January, they have the satisfaction of looking around to see that the reading market has come to Apple and its devices, rather than the other way around.
Meanwhile, Barnes & Noble — the first company not named Apple that figured out how to put all of these pieces together into a multi-purpose color device that consumers actually wanted to buy — now has to figure out how to avoid becoming the first victim of what they helped to bring into the world.
