Nook Media: A Sinking Ship

barnes_noblelogoThe Barnes & Noble investor conference call this morning was one for the, um, books.It was short, lasting about forty minutes, had few questions — none of which were hard-hitting — and was punctuated by moments of silence. I still don’t know if that silence was due to technical problems or if Lynch & Co. were hitting the Mute button on their speakerphone.

And William Lynch made clear that they plan to drop the Nook app store, music, and video. You didn’t notice that? Here’s the quote from the morning press release:

and the underpinning of our strategy remains the same today as it has since we first entered the digital market, which is to offer customers any digital book, magazine or newspaper, on any device.”

Boldfaced emphasis added by me.

Remember, Lynch was the guy who also said, previously:

As the market goes to more multi-function tablets, we have to look at how we offer functionality differently and that’s what we’re focused on now

That gave us Google Play on the color Nooks.

He also said:

We’re not going to continue doing what we’re doing

And that gave us the death of the color Nooks, finally made official only today.

So yeah, when Lynch says something, it actually means something — if you bother to stop to parse it.

Dropping the Nook app store, music, and video tells me that Microsoft is not going to come to the rescue of Nook Media.

What did Microsoft get for its $300M investment? Basically a Nook app for Windows 8. Which Lynch pointed out was released yesterday. It’s going to be a Rocket Man-like long, long time for Microsoft to get that money back unless they’re the first creditor in line at the future Barnes & Noble bankruptcy proceedings.

Further, it was revealed that the majority of eBook sales are to owners of eInk Nooks. “Majority” can mean as low as fifty-one percent, but I think this is an admission of two things:

1) Nook tablet buyers aren’t interested in reading eBooks

2) The entirety of Nook Media depends on a screen technology

What?

Yep. This is why Nook Media hasn’t changed its DRM, adding standard Adobe DRM. They need to lock in customers to survive. If people could swap out all their purchases from Nookbook DRM to Adobe DRM, there would be an exodus of customers from Barnes & Noble in an instant. Keeping that mutant DRM will keep people buying eInk Nooks. Until they, you know, just don’t. Hey William Lynch, iPad Mini, have you heard of it?

What are the things that were never mentioned today?

1) PubIt! (or Nook Press). Lynch has made a point in the past to talk about how well that’s been doing. Today it was placed under the generic “We’re adding four thousand titles a week” to their eBookstore. (And, um, that’s 208,000 titles a year!)

2) The Nook desktop apps. There was no acknowledgement that they’d ever gone missing, no reassurance that they won’t go missing again, and no mention of customers using their desktop software at all (aside from the plug for Windows 8).

3) iOS and Android Nook apps. Apple said there are six hundred million iOS devices out there. Well how many have the Nook app? And what about that monstrous Android market share? How many of those devices have the Nook app? Silence. Has anyone ever seen B&N/Nook Media advertise to either iOS or Android owners? I haven’t. That has to be well over a billion devices that Lynch just ignores. By doing that, he prints himself a Get Out Of Jail card by blaming a decrease in digital media sales on a lack of color Nook sales. Neat trick, isn’t it? Handwaving has never worked so well since the original Star Wars movie.

4) No breakdown of the number of eInk and color Nooks sold. And now I think I know why: Embarrassment. If people knew how few they had sold, the stock would flatline. Lynch said they have “millions” of customers using their website — but gives no breakdown of how many use BN.com for print books (or toys or games or WTF non-book stuff they’ve added) versus Nookbook sales.

Lynch said that the Nook business was now financing itself and had $46M in cash, with no debt. With Tumblr and Instagram going for one billion dollars each, $46M isn’t even a rounding error in the financial figures of the tech world. At that rate, a valuation of half a billion dollars for Nook Media would be at the high end of delusional, never mind dreaming of a cool billion.

Remember: Nook Media is now depending primarily on its customer lock-in eInk Nooks to survive. If they ever wind up breaking even on the tablets in the end is open to lots of debate, but that money can’t be figured into any valuation of Nook Media. It’s now all eInk.

As for partnering with third-party tablet manufacturers, they’ve been there before. And chose a string of losers, like Pandigital — which doesn’t even exist any longer. If that strategy had been even a minor success, wouldn’t they have been encouraged to continue it? Let me remind you that Borders counted on that strategy to survive. Where is Borders now?

And how does Nook Media intend to convince Android device makers to include its software? Google doesn’t want that competition for its Google Play Books app. If you think Google isn’t going to whisper in the ears of Google Certified device makers, I have to wonder if you’re paying attention at all.

As for eInk, if Lynch thinks he can pull off an open Android tablet with an eInk screen, he better wake up. There’s just no cost-effective way to do that now, with LCD tablets moving into the price range of illuminated eInk devices. Again, the Acer Iconia A1-810 is US$169 — and the base price for a tablet like that will go lower by the end of this year. And then lower again next year.

The guts for an effective eInk Nook tablet would have to match that of a regular tablet and whatever price difference there is in the eInk versus LCD screen would be eaten up by software development costs to make the eInk more acceptable to tablet users (no flashing at all, making sure all tablet apps can run despite the color depth being all wrong, etc.), never mind the additional expenses of all the new calls to Customer Service. It would be a version 1.0 product again, eating up development costs to make it right.

There’s just no way out of this box: Nook Media is a sinking ship that needs a deep-pocket buyer or it will go out of business.

16 Comments on Nook Media: A Sinking Ship

  1. WalMart is carrying a Nexus 7-equivalent tablet for $149 right now.
    Pretty good, apparentlly.
    That sets the bar fairly low for sliding in eink devices.
    Time to take eink the next not-lower in price, I think. ($99 for frontlit XGA, $49 for non-lit SVGA.)

  2. “any digital book, magazine or newspaper, on any device.” As long it’s in Canada or USA. They don’t sell any place else.

    • They’ve been selling in the UK for a while now. Also, they don’t sell in Canada.

      • It’s what twice they told me. The last time on April 10: “Because selling books in digital format to international customers involves international copyright laws, tariffs, VAT taxes, currency conversions, etc., only US and Canadian residents are able to purchase
        NOOK Books on the Barnes & Noble website at this time. ” I live in Argentina. So I buy from Amazon. They have no problems
        I have just looked at barnesandnoble.com. Can’t see anything to go to another webstore

        • Write to your elected congressmen and tell them to change their copyright laws. It isn’t BN being evil, it’s them complying with the law (which Amazon so happily flouts).

          • Amazon doesn’t flout copyright law (at least not often). They got publishers and authors to sign contracts. B&N could have sold ebooks under similar contracts had they tried.

          • You can buy from Kobo too, and other booksellers, not only Amazon. They just refuse to sell.

  3. “What did Microsoft get for its $300M investment?” It got Barnes & Noble to settle patent litigation with Microsoft, which had the potential to cost Microsoft far more than $300m. Microsoft has shown no inclination to do anything else with its very modest investment (by Microsoft standards: last year it also wrote off a $6.2 billion investment in aQuantive). I explain the back story here: http://thefutureofpublishing.com/2013/05/microsoft-wont-save-barnes-noble/

    • Very good point. If the rumors of Microsoft’s patent revenues are true [*], delaying a portfolio-damaging court case by even a year (and, IIRC, B&N was both the simplest patent case [fewer cross-claims and other side issues] and the furthest-along) could more than cover the $300 million.

      [*] Which isn’t entirely obvious, even if you stipulate to the rumored royalties and totals themselves – there’s lots of room to play games with Windows Phone “marketing payments” and the like.

  4. The problems B&N have in competing with Amazon are easily fixed. Remove entirely the current cancer that is top-level management and bring in new management that is able to think beyond its nose tip. As long as Lynch and crew remain, B&N will continue its downward trajectory. Current management has developed not one innovative idea; it still views the book business — print and digital — as it was in 1972.

    B&N has several advantages over Amazon but fails to exploit even one. Where Bezos, to his credit, thinks long-term, Lynch, to his discredit, can’t get past the next quarter’s results. You cannot exploit a new market with short-term thinking.

  5. I’m not sure your admission #1 is completely accurate

    1) Nook tablet buyers aren’t interested in reading eBooks

    It might be that tablet buyers aren’t interested in buying *Nook* books. With all the N2A cards floating around (and/or the ease in stripping DRM), tablet buyers are probably buying books. Just not from B&N.

  6. Harsh, Mike, but I wouldn’t expect anything less from you.

    You talk about NOOK Media being the entity in trouble, rather than B&N. Good distinction. Too many people are saying B&N is doomed, but B&N is doing just fine; it’s NOOK Media that’s having troubles.

    Plans to drop the app, music, and video stores: I definitely got that same impression — what’s the point of app stores and video stores if you aren’t making devices that run the apps and play the videos. In the conference call, Lynch said, “The company’s primary focus is to continue to offer millions of customers buying their eContent from Barnes & Noble, an amazing digital bookstore experience.” Bookstore, not app store, media store, etc. Lynch used the same “digital bookstore” terminology many other times during the call.

    NOOK Media does *not* depend on a screen technology. There’s no reason that NOOK Media couldn’t come out with a low-cost LCD-screen dedicated e-reader. For that matter, e-books are also sold to tablet users running the NOOK apps. The devices aren’t the alpha and omega: it’s the e-books that are where the profit is.

    DRM lock-in isn’t the big deal it once was. Load up an app on whatever tablet you have, and there you go. I can read Kindle, NOOK, and Adobe EPUB DRMed e-books on my tablet.

    NOOK Press: Yeah, but not a big factor in the survival of NOOK Media.

    NOOK Desktop Apps: I don’t see these being strategic to NOOK Media. Few people read e-books on desktops.

    Android NOOK apps: My wife and I have three Android devices between us. All came with the NOOK app pre-installed. All but one — my NOOK HD — also came with the Kindle app pre-installed, and I easily installed it. All came with the Google Play Books app pre-installed. I don’t see any sign that Google is (currently) blocking Android devices shipping with apps that are competitive against Google Play.

    Nobody else provides shipping/sales numbers, either. Giving out those numbers arguably would be a stupid thing to do.

    NOOK Media valuation: Yeah. Lunacy.

    Comparison to Borders: Borders was swimming in debt that it couldn’t service, was stuck in long-term leases for stores that weren’t profitable, and outsourced its e-book sales first to Amazon and then to Kobo. NOOK Media claims not to have any debt, it has no physical stores at all, and its running its own e-book stores. Completely different situations.

    E Ink NOOK tablet: This is counter to everything that was said. NOOK Media is getting out of the tablet business, and sees the future of its device side as being dedicated e-readers.

    International expansion: You didn’t mention this, but it was another topic that basically didn’t get mentioned. According to Publishers Weekly, B&N is now saying that their expansion of BN.com to 10 countries, originally slated to be done by this summer, will be done by year’s end.

    Your conclusions: Nah, I don’t buy them. In the end, the survival of NOOK Media has almost nothing to do with devices and everything to do with its ability to compete against Amazon on e-book sales. Alas, I’m still going to have to agree with the bleak projected outcome.

  7. I just want to puncture a common myth about B&N DRM: there is no DRM lock-in. The Adobe RMSDK that everyone (except Apple) uses to read DRMed ePub and PDF files supports both ‘Classic’ and ‘B&N’ flavors of DRM. The vendor just has to implement the workflow (to prompt for credentials needed to authorize) to avoid locking B&N content out. Many third party apps and reading devices do just this (Bluefire, Aldiko, Mantano to name a few), and have for a long time now. Other Adobe-licensing vendors (notably Sony) are lazy or otherwise uninterested in supporting this, for whatever reasons. Now that B&N is manifestly in trouble, perhaps some of these holdouts will make it their business to throw B&N customers a life-raft by making sure that B&N content (at least ePub files) can be imported to their reading systems (or at least the ones that use Adobe RMSDK). Or Adobe should make it a condition of the licensing terms.

    The advantage of ‘B&N’ DRM is that it doesn’t require the additional step of requiring an AdobeID, authorizing the app or device with that, and desktop software to fullfil .ascm files before you finally have a .PDF or ePub file that you can work with. B&N wanted to provide a more seamless user experience, like Amazon’s, and worked with Adobe to come up with this variant. Other licensees of the Adobe Content Server are free to use this flavor as well. It is far more user convenient than ‘classic’ Adobe DRM.

    The disadvantage is that a valid credit card needs to be on file with B&N before you can download an .ePub file, even if you have gift card credits, etc. The credit card number is used as the password needed to authorize the content when opening the book for the first time on a compliant reading system. This is to discourage casual sharing of the file with others, since you’d need to trust them with your CC #. I’m guessing this is the reason no other vendors use this flavor (to my knowledge). They want to be able to serve customers who (reasonably enough) do not trust the vendor with a credit card number that’s permanently kept on file.

    The authorizing credentials are stored as a secure one way hash by RMSDK so there is no way to reverse engineer the CC#, and any content locked with the same credentials will be subsequent opened without any prompt.

  8. So what does this mean for the BN store on the Nook? And for the record, I have an HD+ and I use it to read more than anything else. I could never go back to eInk after using the HD screen.

  9. A searing, witty analysis of B&M’s current dilemma. One of your finest posts ever, Nate.

  10. What this comes down to now is that B&N’s competitor is no longer Amazon, it’s the indie bookstores, same as it always was. Now if all that money spent on Nook went to staff development, inventory management, community outreach, and the like–I wonder we’re B&N would be now.

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