Nook's last stand? B&N still must battle Amazon

Barnes & Noble is ceding the tablet market to larger, deeper-pocketed competitors and focusing on its digital book business. But that means going up against Amazon in a tough mano-a-mano fight.

Barnes & Noble

It may be better to fight one battle than face attack on all sides, but for Barnes & Noble, a direct matchup with Amazon.com is still a fight in which it may be outgunned.

Barnes & Noble on Tuesday said it is pulling out of color tablet design and production . Though it will to continue to design e-reading devices like the black-and-white Simple Touch, it will bring third-party manufacturers into a partnership for products like its Nook HD and Nook HD+.

The decision marks the end of Barnes & Noble's attempt to bat alongside major-league technology companies in the highly competitive tablet market, dominated by the likes of Apple, Samsung Electronics, Microsoft, and Amazon. By focusing on the simpler e-readers that replicate paper display, the rivalry mainly narrows to Amazon.

Barnes & Noble, like other companies, is eschewing the idea that it must make an everything-for-everyone device. But with deep-pocketed Amazon as its chief competitor now, it will be going up against a company that has the Web's biggest Internet store to rely on, while Barnes & Noble's brick-and-mortar book shops continue to grope for their future.

Meager tablet turf
A panoply of big tech companies control most of the market for tablets, making it difficult for Barnes & Noble to break through. In market researcher IDC's snapshot of the tablet market during the first three months of the year, Barnes & Noble didn't make the top five in tablet market share, putting its share below Microsoft's 1.8 percent.

Its spot on the sidelines was clear from Tuesday's bleak fiscal fourth quarter report. In the latest three-month period, Barnes & Noble's Nook sales fell 34 percent, including an 8.9 percent decline in digital content. Nook's adjusted bottom line was a $177 million loss.

CEO William Lynch, a tech-focused executive who took over the helm after leading Barnes&Noble.com, said his plan is to keep customers buying digital content from Barnes & Noble's digital bookstore, while cutting Nook expenses.

Pushing tablet production to a partner will limit Barnes & Noble's "sizable upfront risk" of manufacturing the high-tech Nook hardware on its own, he said, adding it should "significantly reduce Nook losses going forward."

Barnes & Noble has yet to announce the third-party manufacturers, but Microsoft could make a logical fit. Microsoft has already been the subject of speculation about an outright Nook acquisition, after last year, when it injected $300 million into Nook Media for a 16.8 percent stake in the unit.

Barnes & Noble said it isn't commenting on manufacturer partners yet. Microsoft didn't immediately respond to a request for comment.

The downside of success
Nooks have been successful enough to be hurting Barnes & Noble: To be price competitive, Barnes & Noble had to keep is margins thin at best, so the better the Nook sold, the harder the company got hit.

The sale of content for the tablets was Barnes & Noble's ultimate prize. Lynch and Barnes & Noble discovered, however, that the black-and-white e-readers bring in the majority of the content sales. "Those people who buy single-purpose e-readers are the ones who are the biggest readers," Lynch said Tuesday.

Then Barnes & Noble made it easier for rival companies to profit from content purchases made on Nook HD or Nook HD+ devices. In May, it added the Google Play store to meet market and customer demand for access to the full breadth of Android apps.

With that decision came the opportunity for customers to buy e-books from Google just a few swipes away from Barnes & Noble's Nook store.

Hitting the niche
A simplified focus on e-readers means Barnes & Noble, like Samsung, is eschewing the model of making devices that can be everything to everyone.

Samsung debuted a slew of new products in London last week. It introduced a handful of Galaxy smartphones designed to appeal to subsets of the market, such as the dustproof and waterproof Galaxy S4 Active and the smartphone-camera hybrid Galaxy S4 Zoom.

Whereas Samsung is making devices for multiple niches, Barnes & Noble is switching its focus back to its original, core device: the e-reader.

The challenge of retreating to e-readers
However, e-readers are a category in decline. At the end of last year, market researcher IHS iSuppli said the rapid rise of tablets is driving a precipitous e-book reader decline . It estimated shipments of e-readers would fall 36 percent in 2012 and sink another 27 percent this year, to 10.9 million units.

James Martin/CNET

The Nook's deep loss in the latest period was largely linked to discounting the HD and HD+ devices so heavily . The price cuts reduce the value of Barnes & Noble's inventory of Nooks, and the company took a $133 million a charge to reflect that.

Amazon is exerting downward pressure on prices. It's a phenomenon that has plagued another brick-and-mortar retailer: Best Buy. Without the same overhead costs of physical store footprint, Amazon can offer easily searchable, easy to compare consumer electronics at lower prices.

In the case of Kindles, Amazon has long been able to sell them at a price near the cost to produce them -- and occasionally below it -- because it has more opportunities to attach extra sales to the Kindle than Barnes & Noble does with the Nook. When customers buy Kindles, they can buy almost anything else in the world at Amazon's store while they're there. When they want more entertainment on their Kindle, they can become Prime subscribers and loop more revenue back to Amazon.

Barnes & Noble's retail presence, on the other hand, is less than impressive. Sales at longstanding B&N bookshops, excluding the sale of the Nook, decreased 5.8 percent.

Amazon's sales in the latest quarter were up 22 percent.

Barnes & Noble's hope is that by returning to its roots, it can find its future.

It's the right path for the company, Janney Capital Market analyst David Strasser wrote in a note. "But we wonder if these steps will be enough to turn the Nook business."

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