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It’s Time B&N Took the Nook Out Back and Put it out of its Misery

America’s largest retailer released their latest quarterly financial report today. The report covers the 3 months ending 28 July, and while the news was generally good there was also a time bomb buried in the details from the Nook division

Sales in the B&N bookstores and the B&N College bookstores were both up slightly last quarter, with the retail stores reportedly benefiting from "the liquidation of Borders’ bookstores in fiscal 2012 and strong sales of the Fifty Shades of Grey series", while sales via the B&N website continued to drop. And B&N College bookstores saw a fraction of a percent increase which was largely due to new contracts to run more bookstores; same  store sales dipped 2% over last year.

The Nook division, on the other hand, now that’s the fun part of the news today. B&N reported that the Nook segment earned revenues of  $192 million for the quarter, which is up about 3 tenths of a percent. That’s as near as flat as to be no increase at all. But the story gets worse.

Barnes & Noble also states that digital sales (ebooks and apps) were up 46%, while device sales were down significantly due to decreased demand and production issues for the Nook Glow. You have to wonder exactly how much B&N is losing on the Nook hardware, don’t you?

BTW, there’s an interesting discrepancy in the press release. Today B&N is claiming that the Nook division earned $191 million in the first fiscal quarter of last year, while last year they reported earning $277 million during that same period. That’s a difference of some $86 million, which is no chump change.

Okay, this could just be an accounting difference, but the description in the press release is the same. Both figures cover "sales of digital content, device hardware and related accessories". Do you suppose B&N is pulling a sleight of hand to hide how bad things really are?

Absent an explanation from B&N, I cannot tell. But if we look at the rest of B&N’s bad news today, I’d say there’s a better than even chance.

Update: Here’s B&N’s explanation:

The $277 million we reported last year was for the consolidated NOOK business across all of the company’s segments, on a comparable sales basis.  The $191 million of NOOK segment revenues we reported for Q1 this year was on a GAAP basis, not a comparable sales basis.  Comparable sales reflect the actual selling price for eBooks sold under the agency model rather than solely the commission received.

Let’s hope B&N’s plan to sell the Nook to 10 more countries bears fruit, because they’re not getting the same growth in digital that they got last year. This time last year B&N was reporting a quadrupling of digital sales, and that makes today’s new look like the growth in their digital sales are starting to level off. The UK Nook store is expected to launch in October, and adding 60 million consumers should ameliorate the plateau.

P.S. And in other news, B&N also mentioned that they’re still working to spin off Newco, the new subsidiary which they and MS launched earlier this year. That process should be complete this fall.

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JimS August 21, 2012 um 12:51 pm

I have a rooted Nook Tablet and a Nexus 7. I prefer the ergonomics of the NT for holding, and love the non-reflective display with accurate colors. However, Jelly Bean on the Nexus 7 is so much a better OS for doing anything other than looking a photos or reading books.

The Nook Tablet is over 18 month old now. Folks interested in buying one did so long ago (at least in the US). What could be B&N’s next hardware act? I don’t think they have one. I don’t think they can compete walled garden vs. walled garden with whatever Amazon comes out with next given the limitations of B&N’s garden. And I don’t think they want to try to compete with Google in the generic Android 7″ tablet market given Google’s deep pockets and access to the latest versions of Android.

Maybe the only path out is to be one of the first Windows8 tablets with some e-reading enhancement. But the Windows8 tablet market may be a crowded arena too.

Anybody else see path forward for B&N on the hardware front?

Mike Cane August 21, 2012 um 2:24 pm

>>>Anybody else see path forward for B&N on the hardware front?

The Nook Mini?

Gallows humor.

cookie August 21, 2012 um 3:48 pm

Get out of the hardware business because they can’t compete. Then get out of the book business because they can’t compete.

Peter August 22, 2012 um 12:44 am

Color E-ink combined with Glowlight should look pretty cool. It sounds like that’s what they’re working on for this year. If they do it with Windows it might be a double whammy and earn them a quarter or two of nice, profitable sales before copycat-ing begins.

But that’s okay.

Barnes and Noble has crazy-like-a-fox goals- that’s why the earnings are moving in the right direction again. We just aren’t clever enough to realize that they’ve goaded the entire electronic manufacturing industry into playing the game they way they want it played.

Geert August 21, 2012 um 1:10 pm

In my opinion B&N should stop developing tablet devices. They cannot afford to compete with other tablet manufacturers, and they cannot afford the developers needed to keep all their firmware versions up to date and fix all known bugs.

For hardware devices they should concentrate on further developing the current Nook Simple Touch and the NST Glowlight. Because although the hardware is great, the software is not that great. They should spend their limited development resources on fixing all the bugs in the NST software and adding new features. There should be a firmware update every half year fixing bugs and adding new features.

Instead of building tablets they should invest in enough developers to fix all the bugs in the software Nook ereaders (PC/Mac/Android/iOS) and to give these ereaders all the features of their current tablets. And with these ereaders we should also see an update every half year.

Logan Kennelly August 21, 2012 um 2:20 pm

I’m not sure they have developers on-hand to do anything. The strong impression they give to me as a customer is that they contract out everything that they do. One result of this is that they can’t provide bug fixes in a timely manner, and another is that they are always starting from scratch. The e-Ink, Color/Tablet, Android, and PC applications are all so different as to be laughable. On the other hand, Amazon feels like they have actual developers and make continual progress (to the point where I feel that Amazon finally closed the gap on B&N and started to pass them).

I’m just not convinced that they have invested into long-term product development of the Nook line. I hope they prove everyone wrong, though, and release a unified platform with the best features from every aspect of Nook and Nook Study, but we are talking about the company that can’t properly implement a single wish list.

Geert August 21, 2012 um 2:30 pm

As I understand it sofware development is outsourced to a Russian company. But that does not have to be a problem. Amazon has probably also outsourced Kindle software development. But you get what you pay for. And in case of the Nook it always feels like the developers have to do too much, with too few people, in too little time.

DavidW August 22, 2012 um 6:46 am

Bad advise. It was the Nook STR that badly undersold, not the tablets.

Nate Hoffelder August 22, 2012 um 7:29 am

Except that B&N has all the Nook devices available as refurbs on Ebay. That’s a good sign that they’re all underselling.

Alexander Inglis August 21, 2012 um 1:49 pm

Re: discrepancies with Q1 2011. If you are comparing last year’s quarter with this year, based on last years press release, you are comparing bananas and oranges.

B&N changed how it reports its divisions last quarter so that the Nook division more acurately reflects digital sales and Nook hardware; previously it included b& (which sells more than digital goods) and better assigned retail costs of hardware sales to Nook rather than retail. As usual (for many corporations) the exact details of the reporting are vague but they did restate relevant time periods for valid comparisons. You will have to stick to the current story and not dredge up last year’s.

Peter August 21, 2012 um 11:04 pm

They also used to report two different sales numbers for the nook division. One was official and complied with GAAP and the other was non-GAAP and was intended to be more common sense.

The old CFO retired, and his replacement stated he wouldn’t do the non-GAAP reporting anymore as it was confusing the analysts.

Peter August 21, 2012 um 10:52 pm

The GAAP accounting rules governing agency sales result in absurdity in the case of ebooks.

If you buy a book for $10, and the retailer margin is $3, that is reported as $10 in revenue and $7 cost of sales. But if you buy an ebook, same price, same margin, accounting rules dictate it is simply $3 in sales and no cost of sales.

So, that creates confusion.

Amazon runs into the same rules when they allow third party merchants to sell on their site.

Robert Nagle August 22, 2012 um 2:16 am

Well, maybe market forces will drive Nook out, but the Nook devices were always a step ahead of Kindle’s devices in features and epub support. Instead, what we are left with is Kindle’s two proprietary (and idiosyncratic) formats and lots of software apps for Android and apple tablets.

From a publisher’s perspective, it was a LOT easier to produce ebooks for the nook than the kindle. I think one thing which hurt the Nook is that Amazon’s "most favored nation" clause pretty much guaranteed that BN’s prices would never be lower than Amazon’s. Another thing is that BN’s website majorly sucks and never really attracted a loyal audience of reviewers. (That’s one reason they should have partnered with a librarything or goodreads would be to gain access to their contributed reviews).

If the Nook failed, it would not be for technology reasons, but business ones. Amazon has definitely innovated with Amazon Prime and other things

fjtorres August 22, 2012 um 6:26 am

Nook is "ahead" in epub solely because Amazon doesn’t believe in epub. They believe in mobi format, after all. And even there, Amazon is already selling deices that support KF8, their rich content answer to epub3 while B&N is nowhere to be found there: rich content ebooks are an Amazon and Apple game because everybody else is apparently waiting on Adobe. So much for running with the herd…
Feature-wise Nooks are generally comparable to Kindles but *not* in any way superior.
The two just have different priorities.
B&N is quicker to pull the trigger on new hardware features (touch and frontlighting) but slower on software and reading features. Amazon on the other hand features TTS, XRAY, personal document conversion, audio ebooks, and other long-standing features Nook doesn’t even try to match.
Nooks are nice enough readers but let’s not puff them up into something they aren’t. Nook has stengths and weaknesses all around and if Nooks do fail (which I don’t see happening quite yet) it will be because of software issues, customer issues, and inventory management issues as well as technology issues. Fragile glowlight screens is a technology issue, after all. So is their their dependence on Adobe for their core reader software.
B&N isn’t going to give up the ghost just yet but their failure to build a profitable business out of a quarter of the US ebook market suggests the Nook operation has serious hidden problems beyond the ones we can see from the outside.

willem August 22, 2012 um 11:28 am

Do they really have 'serious hidden problems' though? Seems rather obvious to me:

1) Heavy upfront cost for development, mainly hardware. This never stops since a refresh comes every year.Margins on the hardware razor thin.

2)B&W ereader sales are falling sharply as the pool of heavy (mainly fiction) readers dries up. This leads to

3)tablets where B&N is merely one amongst many. The lead tablet makers are Apple, Amazon, Samsung, Google etc. B&N as a company is not in the same league as these guys, because

3)Lack of scale all across the business, and a lack of diversity. Not enough users of their digital content as yet to offset the costs described in 1) above.
Leading competitors – Amazon, Google, Rakuten – are bigger, way more diverse in what they sell, and thus can bear the costs of investment much more easily.

The easiest solution to these problems remains a buyout, ether of the company as a whole or just the Newco unit. Otherwise…

Nate Hoffelder August 22, 2012 um 7:27 am

Features? Not really, no. The Kindle platform offers more features than the Nook platform.

Doug August 22, 2012 um 7:05 pm

Kindle’s *two* proprietary formats? They’ve got four:

* Topaz — mostly old stuff where Amazon republished print into e-book
* AZW — the usual format for most Kindle e-books today
* AZW4 aka KPR aka Print Replica — mainly e-textbooks
* KF8 — the latest and greatest for enhanced e-books

Isola September 8, 2012 um 1:54 pm

Barnes an noble made the nook a non working device to their service for customers who do not have an active credit card on file with them at all times. It does not matter if you would like to pay cash check visa gift card or their own barnes an noble gift card. Thanks to their drm installed to register and set up an account to order ebooks you have to give them an active major credit card or your debit card to your bank account if for any reason the they become active so does your account with b&n and until you file a new major credit card or debit card you can not order ebooks even with a cash method. I have asked them to take their drm and their software ads off my device since it takes up space which i can use of my choice they said no. This is not right to sell a customer a device then gift cards to purchase products for it then tell you cant unless you give them cards they require as well. Which is not being explained to customer before making purchase i talked to 5 differnt retail stores and they do no.

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