Barnes & Noble Gets Ready to Spin Out the Nook

Barnes & Noble Gets Ready to Spin Out the Nook
Nook Tablet
Photograph by Paul Taggart/Bloomberg

The Nook was supposed to help usher Barnes & Noble into the future. It doesn’t look that way anymore. Today, the book chain’s chairman and biggest shareholder, Leonard Riggio, said in a regulatory filing that he is interested in buying the company’s stores and website, but not its e-reader business.

Riggio, and plenty of others, had been hopeful that Barnes & Noble could compete with, if not outdo its rivals—first Amazon’s Kindle and then Apple’s iPad. The belief that Barnes & Noble could make the transition to the digital age, and then thrive in it, was one reason Riggio was able to hold off the billionaire activist investor Ron Burkle in 2010. The next year, the company introduced a new black-and-white e-reader, the All-New Nook, designed by Robert Brunner, who had once worked at Apple. Both Microsoft and Pearson took minority stakes in Nook Media in the past year.

In January 2012, William Lynch, the company’s chief executive officer, said: “We have a NOOK business that’s growing rapidly year-over-year and should be approximately $1.5 billion in comparable sales this fiscal year. Between continued projected growth in the U.S., and the opportunity for NOOK internationally in the next 12 months, we expect the business to continue to scale rapidly for the foreseeable future.”

But, as the attention of computer companies and consumers has turned to full-featured tablets, Barnes & Noble has struggled to catch up with deeper-pocketed rivals. It competes in the market with the Nook Tablet and Nook Color, devices with 7-inch screens that both run versions of Google’s Android operating system. And the game isn’t about just a device; it’s about building a comprehensive ecosystem of services and apps. Barnes & Noble simply doesn’t have all of the assets needed to build anything like that—Amazon, Apple, and Google obviously do. The bookseller has also been outflanked on the e-reading front, as Amazon built a catalog of titles exclusive to the Kindle with its various publishing divisions and its e-book lending library, which is available for free to members of its Prime shipping service.

Barnes & Noble now finds itself in a battle it can’t hope to win. Companies like Apple, Google, Amazon, and Microsoft are jockeying for position in the fast-growing tablet market. Amazon is selling its Kindle Fire devices at cost; Google may soon open stores to showcase its growing assortment of hardware, including its Nexus 7 tablets. Microsoft is spending millions to market its Surface tablet. And with the iPad Mini, Apple has recovered quickly from ceding the market for smaller, 7-inch tablets.

Not surprisingly, in the face of this withering competition, the Nook’s momentum has slowed. The division had sales of $160 million in the quarter that ended in October. The company reports earnings Feb. 28.

So what’s the future of the Nook in this hypercompetitive environment? With shrinking revenue and same-store sales, the retailer can’t make the kinds of investments necessary to compete with the big boys. If the Nook division is spun out, as the company has long contemplated, perhaps one of the device’s deep-pocketed investors—Microsoft—will double down to take fuller control, shift the operating system from Android to Windows 8, and then use it to try to make further inroads into the tablet market. It’s difficult to imagine any other scenario where the Nook lives on.

There’s plenty of irony to go around here. A decade ago, Microsoft pioneered the tablet market with stylus-enabled touchscreens running Windows. But Microsoft didn’t quite get it right and the tablet market didn’t take off until the iPad. Similarly, back in the 1990s, Barnes & Noble sold one of the first mainstream e-readers, the Rocket eBook. When those didn’t sell, the Riggios shut down their early e-reading efforts and then were caught flat-footed by the introduction of the Kindle in 2007. In a sense, Microsoft owning the Nook brand would provide a perfect synchronicity—two endangered brands holding hands amid staggering odds and a market that is inexorably moving away from them.

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