May 12 2013
At the beginning of the year, rumors started at Barnes & Noble would be looking to spin off its Nook Media entirely. Len Riggio, the chairman of Barnes & Noble, express interest in buying back the retail arm. Over 95% of the retail stores are profitable and Barnes & Noble is increasing profitability by refusing to renew expensive leases and encouraging in-store promotions from publishers. Penguin, for example, has established kiosks within a select few Barnes & Noble stores. This has been successful enough to warrant a small expansion of the kiosks.
About a month ago, Mike Cane speculated that the Nook Tablets would likely be discontinued perhaps even as early as the end of the year. The basis of Mike’s accurate guess came from announcements regarding Microsoft’s small-scale tablet. Internal documents reveal that Nook’s Android based tablets are being phased out by the end of the year, as reported by Tech Crunch. But Mike is also right in that Nook cannot miss a holiday season. It must, by October at the latest, reveal its next generation device.
Given Microsofts $300 million investment in Nook, it seems likely that the next Nook will be a MS Tablet. Microsoft has one of the most robust and popular videogame platforms in the Xbox. It does not, however, have a great content platform. The marriage of Nook’s content platform with the hardware expertise of Microsoft makes sense for both parties. Barnes & Noble never understood the customer support it would have to provide for its digital content and digital devices. Microsoft has never been a very good customer support service either; however, it has a much better idea of the ways in which consumers need to be serviced for their technological questions.
Barnes & Noble understood how to sell books in the stores they did not understand the digital consumer.
The problem is that Barnes & Noble can’t completely divorce itself from digital books. To do so would be giving up at least 30 to 50% of the reading market. On the flipside it doesn’t make sense for Microsoft to keep the Nook branding. If Microsoft wants to make it a player in the digital content marketplace competing against Amazon and Apple and even Google, Microsoft should rebrand the Nook. It’s not like the Nook has that positive of brand recognition unlike Barnes & Noble.
When Barnes & Noble divests itself from the digital platform it will continue to need to sell digital books so that it appears as if they are a forward thinking company. Additionally, to abandon the existing Nook customers would create huge and negative publicity. It doesn’t make any sense to think about past mistakes Barnes & Noble made with the tablet such as selling it with no content other than books and magazines and forcing its users into a walled garden. The question is how do they go forward.
The 95% of profitability for the brick and mortar stores for Barnes & Noble likely rests on digital remaining at 30% adoption. In store sales will probably exclude almost all mass markets to focus on trade paperbacks and hardcovers. New display space can be recaptured from the Nook technology space, unneeded once that unit is spun off and purchased by Microsoft. In that space, Barnes & Noble can sell high margin items that are likely not related to books but corollary products such as cookware, housewares, and other sundries. Maybe there will be an even greater focus on games and toys. (I saw yoga mats in my Barnes & Noble at one time).
But, digital books will still need to part of Barnes & Noble’s future. They could integrate in store sales with QR codes for every book that a consumer could snap with their smartphone that would result in a frictionless purchase and download to the smartphone’s reading app. Barnes & Noble often gives you a receipt with a list of five complimentary books. Instead of simply printing out the titles and authors, that slip should include a QR code or barscan that consumers could scan and purchase books at home.
In other words, Barnes & Noble, in order to survive, cannot completely abandon digital books. In fact, even if they sell off Nook Media, there needs to be a strategy to bake digital book purchases into a retail experience. This is the one advantage Barnes & Noble has over Amazon and they need to leverage the hell out of it.