B&N’s Past Tablet Failures Don’t Bode Well For Their Future Plans
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:
Year ending April 30 2011 NOOK EBITDA: (209 million USD)
Year ending April 30 2012 NOOK EBITDA: (261 million USD)
Year ending April 30 2013 NOOK EBITDA: (475 million USD)
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.
steve February 27, 2014 um 12:40 pm
"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."
My impression is that this time their business model will be different; a hardware partner is supposed to take on most of that costs of designing and manufacturing the tablet, with B&N adding their content library, and giving it exposure with shelf and display space in their stores. This model doesn’t guarantee success, but provided they estimate demand properly this time, instead of overproducing and getting caught holding inventory like they did before, they at least shouldn’t see the kind of horrific losses they took on their last tablet venture.
A new NOOK tablet, in order to be successful, would have to 1) hit a low price point and give great value; 2) offer innovative features to differentiate the product from competitors, such screen technology; 3) incorporate productivity functions and aid them in going after the still relatively undeveloped education market. That seems like the only path to success for Nook.
Elaine February 27, 2014 um 12:45 pm
I go into the closest B&N about once every three or four weeks. When I do, I walk past an empty Nook desk, where I haven’t seen anyone for months and months. I also walk past a large cardboard display featuring a promotion (for something) that expired in 2013. It doesn’t give one a lot of faith in the future of the Nook as platform, or indeed, in B&N as a bookseller.
Granted: it would cost money to tear town the Nook kiosk, but surely someone could move the cardboard display to the trash.
Robert February 27, 2014 um 1:07 pm
Don’t forget the multiple displays of unsold Nook tablet covers in a few dozen distinct styles. They seem to have a LOT of those languishing in stores.
Tyler February 27, 2014 um 10:45 pm
I never understood why there were so many freaking covers. It seems like there is a ratio of 20 to 1 vs number of devices that they work with.
flyingtoastr February 27, 2014 um 1:23 pm
This whole opinion is based on the assumption that BN is going to release a consumer tablet. On the contrary, if you actually listened to the analyst call it’s pretty clear that BN is pivoting to the education market, a market where they have a massive presence (and Amazon has almost none) and expertise.
And that’s ignoring the simple factual inaccuracies, like the price of the NC (which launched at $249, not $199).
Nate Hoffelder February 27, 2014 um 1:30 pm
They’re pivoting to the ed-tech market, but so what?
In the education market B&n is going to have to compete with Apple, Google, Newscorp, Pearson (which partners with Dell, HP, and others), and other dedicated players. This hardware pivot isn’t any smarter than releasing a consumer tablet.
flyingtoastr February 27, 2014 um 2:10 pm
If you actually took the time to listen to the analyst call you would know that this new educational push is being done in conjunction with Pearson.
More to the point, everyone you listed has largely failed in the educational market. Apple is too proprietary. Google is a bit player in ebooks in general. None of them have made any real headway into etexts.
You also ignored a major reason BN failed in the general tablet market: advertising. Amazon spends six times the entire market capitalization of BN just peddling their Kindles. Samsung and Apple, even more (plus their built-in brand cachet in the tech market). BN doesn’t have this problem in the educational market. Their textbook adoption system contractually obligates schools to provide booklists through BN’s system, which gives BN a free first-crack at conversion to their platform. Moreover, it was stated that the company’s new text platform will be device-agnostic, meaning BN can push their new TextNOOK as the "premier" experience will still getting conversions from customers with iPads, Galaxies, or Surfaces quite easily.
Nate Hoffelder February 27, 2014 um 2:52 pm
Okay, I just read the transcript. I don’t think B&N is working on an education tablet.
Our education applications are approaching their initial release.
Our device-agnostic platform will enable students to not only purchase textbooks but to also organize, read and annotate textbooks on the device of their choosing.
Can you point me to the mention of the educational tablet?
Nate Hoffelder February 27, 2014 um 2:54 pm
And I think it’s ridiculous that you would describe Apple as being too proprietary. They dominate the ed-tech tablet market. Also, Google and newsCorp only just got started. It’s too early to write them off.
flyingtoastr February 27, 2014 um 4:36 pm
Apple doesn’t dominate "ed-tech" because people are buying etextbooks from them, they just sell a ton of iPads in general. If there’s one thing you can be sure of it’s Apple’s propensity to brag when things are going well (look at their big events for app sales or music downloads). There hasn’t been much of a peep about the textbooks from iBooks2 since pretty much when it launched.
Back on topic: you’re right, BN didn’t mention an education focused tablet specifically, but read between the lines.
BN stated that their new etextbook platform is going to be device-agnostic, which means they’re aiming to hit multiple operating systems. At the very least we’ll see OSX and Win8 (both of which the current application supports), but I’d also strongly assume they’ll also get it onto Android and iOS. Right there, you’ve got support for the NOOK device OS, which means integration is simple.
On top of that, look at the timing. Releasing a consumer device in early summer is suicidal – it’s too late to take advantage of the Mothers Day holiday spending, and too early to be relevant against the autumn releases by the major companies. However, it’s the perfect time to release something if you’re trying to get into the education market. It gives them a month or two to spin production up, cover distribution and training, and work out any last bugs before the fall rush hits. It puts them in perfect position to have the device on display at every freshman orientation.
And again, the new BN management realizes they can’t compete head-to-head with Apple and Amazon’s marketing budgets. But they have a ready-made captive audience in the college market that heretofore has been largely neglected. They’ve got the largest textbook publisher in the world helping them out to boot. It would be idiotic not to push into the market.
I am willing to bet that the new NOOK will have etextbooks as a major part of it’s marketing at the very least, if not the central aspect of the device.
Nate Hoffelder February 27, 2014 um 11:35 pm
"Apple doesn’t dominate “ed-tech” because people are buying etextbooks from them, they just sell a ton of iPads in general."
Apple is the single largest ed-tech tablet seller. Yes they do dominate the ed-tech tablet market. And what i wrote was ed-tech tablet market, not simply ed-tech. There is a difference.
"Back on topic: you’re right, BN didn’t mention an education focused tablet specifically, but read between the lines. "
So basically you castigated me for not catching details that didn’t exist outside of your own imagination?
"On top of that, look at the timing. Releasing a consumer device in early summer is suicidal"
Who said that it had to be early summer?
Sorry, but at this point you have yet to present any evidence that said tablet is not a consumer device, nor that it will have any luck in being sold to college students.
flyingtoastr February 28, 2014 um 1:00 am
"Who said that it had to be early summer?"
I know maths are hard for you, but BN’s fiscal 2015 begins May 1st, and Huseby stated that the new device will be released in the first quarter of FY2015. That means early summer.
Nate Hoffelder February 28, 2014 um 6:46 am
And I know reading comprehension must be hard for you, because the quote from the transcript is
"in early fiscal 2015"
It’s not uncommon for consumer tablets to be launched in August. That would only be 4 months into the fiscal year, thus fitting into Huseby’s time frame.
fjtorres February 27, 2014 um 1:50 pm
Doesn’t matter what the tablet is like.
The market for consumer tablets looks to be at peak:
And Windows tablets are on the rise.
In the android tablet space I wouldn’t bet on anybody not named Samsung or Lenovo.
Not even Google.
Best hope for Nook is to pay Samsung or Lenovo to carry their reading app.
Nate Hoffelder February 27, 2014 um 2:00 pm
It’s not just that the consumer market is saturated; many of the competitors in the ed-tech market are repurposing their consumer tablets for that market.
In my comment above I mentioned Pearson. They have content hardware bundle partnerships with HP, Samsung, and Dell – at a minimum. Here’s my source:
Victor February 27, 2014 um 1:51 pm
"The 4 horsemen of B&N’s apocalypse".
Fbone February 27, 2014 um 3:18 pm
The 20% ebook market B&N is claiming may not be too far off the mark. Nook sold $183 million in content the last three quarters which is over 16% of your $1.5 billion estimate (using 75% of full year $1.5 billion).
Nate Hoffelder February 27, 2014 um 3:24 pm
Off the mark is off the mark.
And I think the ebook market is well over $2b; the AAP figures alone say that the half of the ebook market tracked by the AAP is at least a billion. I would double that at a minimum.
flyingtoastr February 27, 2014 um 4:38 pm
Half the market? Sorry, but you’re applying Howey’s numbers where they don’t belong again.
Nate Hoffelder February 27, 2014 um 4:42 pm
Nope. That’s not Howey’s number; it’s based on AAP’s own figures for 2012. It’s a little out of date now but it’s the best I have.
flyingtoastr February 27, 2014 um 5:26 pm
Then where are you getting the "AAP is only half of the market"?
Nate Hoffelder February 27, 2014 um 5:47 pm
fjtorres February 27, 2014 um 5:32 pm
Yeah, I remember that.
And doubling it is conservative if you’re talking 2013. About right for 2012, when Amazon was estimated at $1.2m all by itself.
Fbone February 27, 2014 um 7:57 pm
If we use Bookstats' figures cited in your post, Amazon would have 84% of the US ebook market. That seems high.
Also, we don’t now what these companies consider "ebook market" when making % claims.
Nate Hoffelder February 28, 2014 um 9:08 am
What other data are you using to arrive at the 84%? I don’t understand.
Garry February 28, 2014 um 12:00 pm
Mismanagement at its finest! B&N should have cut their losses 2 years ago, dump the hardware!. They could totally turn this around…. if they are selling $57m in content a quarter, that’s about $17m in gross profit (Agency). Invest $2-$3m in improving their iOS and Android app experience. Reduce hardware overhead, staff etc..and then you have a profitable business.
Start bundling physical and digital, free wifi in-store, location monitoring, push out recommendations as soon as customers walk through the door…etc..etc..
David B. Huber March 17, 2014 um 7:09 pm
B&N simply never listened to their users. A very loyal and vocal community divided into two camps: "I just want to read!" and "These features would be nice, but start with filesystem support as a shelving option." The former were vociferous, but despite cutting back on eink reader functionality with each new model B&N simultaneously added tablets to the mix. The market research entombed in the B&N Community Forums is phenomenal yet invariably ignored despite a dedicated "Nook Ideas and Suggestions" forum (still requesting shelving options after all these years!)
Had they followed their loyal user’s suggestions and developed a "Nook 2" eink + LCD model instead of going the "Nook Color" route (best handled as apps for everyone else’s generic hardware) they would have thrived.