Yesterday Barnes & Noble reported their 5th straight quarter of shrinking digital revenue, with the latest quarter costing them another $61 million EBITDA. This represents not just a single quarter, but the latest quarter in 4 years of B&N losing money on the Nook.
So far as we can tell from publicly available info, after nearly 5 years Barnes & Noble has not made a profit on their digital investment. In retrospect that was a bad investment, but I’m not sure that the same can be said at the time.
I was reminded of this fact last week when a member of MobileRead dug up a few details from B&N’s annual reports, and as I looked over the figures and did some digging of my own I was convinced that B&N’s mistake wasn’t in investing their hopes in digital; it was their investment in tablets that appear to have done them in.
While we can’t tell how much B&N spent in launching the Nook in 2009 and early 2010, we do know that for the subsequent fiscal years B&N has reported losses every year:
FY 2014 is only three quarters done, but with yesterday’s news we now know that B&N that B&N has lost $162 million over the past 3 quarters, bring the total reported negative profit to $1.1 billion.
So how much has B&N lost overall? That I cannot say.
B&N launched the Nook Store during fiscal year 2010, but they did not break out its expenses and revenues in the annual report (PDF). Just about the only detail I did find is the claim that Barnes & Noble had a 20% share of the US ebook market (in the middle of 2010, to be exact).
That detail is not as useful as hard facts about B&N’s expenditures, but it does put the subsequent losses into perspective. In subsequent years B&N claimed a 26% share and a 27% share of the US ebook market (in June 2011 and late 2012, respectively). There’s no way to tell whether these figures are even close to being accurate, but if they are accurate then it tells us that B&N threw away a couple hundred million dollars a year to basically tread water.
Edit: I just learned that B&N is claiming to have 20% of the ebook market at the moment. Given that they sold $57 million in content last quarter (in a market worth at least $1.5 billion a year) they are probably blowing smoke.
Or does it? If we look at it in 20/20 hindsight it’s easy to see where B&N went wrong, but based on what was happening at the time Barnes & Noble wasn’t necessarily making bad decisions.
Remember, the period of 2010 to late 2012 saw inconsistent but strong growth in both ebook sales and the number of people who had read an ebook. It’s difficult to find details for 2010, but Pew Research Center reported that the number of American readers who had switched from paper to also reading ebooks rose from 21% in late 2011 to 30% in November 2012.
This group represents readers who were going digital for the first time, thus making them the ideal customer for B&N as well as a good justification for B&N’s sinking even more funds into the Nook platform.
As we look back, I think it’s clear now that B&N investing in the Nook wasn’t a mistake; their mistake was in investing in tablet hardware with its high capital costs and thin margin. And even that wasn’t a bad idea so long as B&N didn’t have any cheap tablets to compete with.
Remember, the Nook Color was launched in 2010 with no direct competition, and B&N reported decent growth over the following year.The NC was a 7″ ereader which ran Android. At $249 it was pretty pricy, but in early 2011 it didn’t really have any direct competition so the price was reasonable by the market standards of the day.
That of course ended when the Kindle Fire launched in late 2011, but even with that cut-price competitor B&N still managed to hold their own for much of 2012. They were somewhat successful in fighting off the many $99 budget tablets which launched that Spring, but I think their fortune changed once Samsung and then Google launched budget tablets of their own.
Samsung released the Galaxy Tab 2 in April 2012, and Google released the nexus 7 in July 2012. Those 2 tablets, which were priced at $249 and $199, probably finished off what the original Kindle Fire started.
All of a sudden B&N’s leading tablet, the Nook Tablet, had to compete with similarly priced and well built tablet which offered hundreds of thousands of apps as well as access to multiple ebookstores. This lead to many readers wondering why they would buy a locked down Nook Tablet instead of an open tablet from Samsung, Google, or someone else. And when the Kindle Fire HD launched in late 2012, that was merely the final straw.
By late 2012 B&N’s Nook revenues had leveled off, showing only a slight growth in the quarter spanning August through October (and even less growth in the quarter before that), before starting the decline over the 2012 holiday season – a decline which the Nook revenues have not recovered from.
Remember, in late 2012 the number of readers going digital for the first time was still increasing an a decent clip. The potential Nook customer base increased, while revenues leveled off, leading me to think that people were being drawn away to other platforms when they bought other tablets.
B&N’s mistake was ignoring the similarly priced competition when they launched the Nook Tablet in 2011, and then proceeding to ignore the competition for the 2012 calendar year. Had B&N responded to the competition sooner, they probably would not be where they are now.
If we’ve learned anything from the past few years, it’s that B&N’s biggest mistakes weren’t the investments in ebooks but their decision in developing and releasing tablets. That does not bode well for their future plans, not given the fact that they plan to release a new tablet some time in late 2014.
Would anyone care to guess whether that tablet will be any more successful than the last two? I am not confident it will.