February 28, 2014

Barnes & Noble could be doing worse, but the Nook is still a disaster


Don't panic! Barnes & Noble is finally going to get the Nook right.

Don’t panic! Barnes & Noble is losing tons of money on the Nook, so they’re making a new one.

On Wednesday, Barnes & Noble released its third quarter results for the fiscal year 2014. The company reported a profit (though revenues were down 8.8% compared to the previous year), but the Nook remains a financial albatross. In a conference call accompanying the report, the company addressed the Nook’s struggles with conflicting messages, saying the company has cut 190 positions in its Nook division over the course of the 2014 fiscal year but that—everybody get excited!!!!—a new tablet that will lose even more money will be released in the financial year 2015.

Barnes & Noble’s Nook division remains sizable—it currently contains “about 500 positions,” according to Publishers Weekly‘s Jim Milliot. But more cuts are likely. But wait, there’s more:

CEO Mike Huseby noted that B&N estimates that future Nook restructuring charges could cost the company another $40 million. He also said B&N was considering closing its existing Palo Alto Nook office and relocating employees to another office, possible back in New York. Huseby reiterated that the company is close to reaching an agreement with a third party manufacturer to release a color tablet this fall. He said the goal for B&N is to find the right balance in developing hardware that Huseby acknowledged is crucial to driving digital content sales, while still controlling costs. To that end, he noted, B&N’s plan is to produce reading-centric devices with more of an emphasis on leveraging collaboration with hardware patterns. Huseby said he is hopeful that as B&N works with technology companies, including Microsoft, that it can put its “content catalog” of about 3 million titles plus magazines and newspapers on their platforms.

As Businessweek’s Joshua Brustein noted in his piece about Barnes & Noble’s third quarter, there’s an apparent strategy here, even if doubling down on a division that has lost hundreds of millions of dollars seems counterintuitive:

Like its major foil in e-reading, Amazon.com, Barnes & Noble sees making e-readers not as an end in itself but as a way to sell digital content. In short, Barnes & Noble doesn’t have the breadth or the resources to do that; it’s hoping that a healthy Nook business gets people into stores, and vice versa. “We firmly believe that having a digital offering is vital for our mission and [is] relevant to the booksellers,” said [Huseby], in an earnings call. “We also have the opportunity to better package physical and digital content offerings together, and we are actively considering and testing.”

In this context, Burstein argues, the Nook sales that have characterized B&N’s fiscal year look less like the actions of a company fleeing the hardware market and more like “clearing the table and starting again.” That said, given B&N’s digital history, it’s unclear whether the expense cuts (and the $40 million restructuring cost) will be difference-makers. One certainly hopes that they’ve finally figured out the game, but a smaller staff plus a new tablet plus an expensive “restructure” does not necessarily mean success, as Burstein goes on to note: This doesn’t solve the main problem that Barnes & Noble faces with the Nook, which comes from the company’s desire to make money from ebook sales. Its major competitor in the e-books business doesn’t have to do that: Amazon’s e-book prices are consistently lower, as it sees books as just one plank in a wider strategy.” In other words, there’s not a lot here that suggests growth.

In this sense, the announcement is characteristic in that it privileges cost-cutting over innovation, without fully committing to austerity. The company has maintained profitability (in part) by cutting stock and staff, and they seem to be toeing the line here. But they’re also sticking with a product that’s lost a staggering amount of money since its inception, seemingly because they believe remaining in the digital marketplace (even at a huge loss) is more important than cutting and running, as everyone’s favorite president, George W. Bush, would put it. At a glance, this strategy seems tailor-made for investors, until you remember that Barnes & Noble’s investors hate the Nook. (Those pissed off investors may get what they want, however. In the conference call, B&N acknowledged that breaking up the company remained possible.) So, while Huseby argues that the digital marketplace is “relevant to the booksellers,” it’s hard to imagine that investor appeal, plus increased foot traffic and bundling are compelling enough reasons to stick with a flagging ebook business.

Barnes & Noble’s rationale may be unclear, but hey, who cares. We’re getting a new tablet, and soon! That might be just what B&N needs. It just probably isn’t.


Alex Shephard is the director of digital media for Melville House, and a former bookseller.