The Nook Costs Too Much for Barnes & Noble

During the holiday retail season, the Nook sold well but has created a loss for Barnes & Noble. “Barnes & Noble Seeks Next Chapter” by Jeffrey A. Trachtenberg and Martin Peers of WSJ.com reports, the company announced that they could lose more money than expected and considering spinning off the Nook into its own business. Most would not spin off a successful aspect of their business, but the cost of making and advertising the Nook is causing the company to lose money.

The article describes the cost:

“Developing, manufacturing and promoting e-readers and tablets requires heavy upfront spending… spending on advertising has more than tripled since 2009… to promote the Nook, the retailer returned to national TV advertising in 2010, after a 14-year hiatus, buying spots on popular programs such as ‘American Idol’”

The result of such cost is that “[the company’s] earnings before interest, taxes, depreciation and amortization—a critical measure of earnings—fell to $163 million in the fiscal year ending April 30, 2011 from $281 million in fiscal 2010”

Although Barnes & Noble stated their holiday device sales were up 70% from last year, “likely to notch $1.5 billion in sales in current fiscal year”, and the CEO stating that “[the company] has plenty of capital to continue financing the Nook expansion, including a $1 billion credit line”, the company cannot handle operating the Nook business. The options listed for the Nook are selling a stake in the business, selling the Nook all together, and/or a split.

In the midst of all of this, Barnes & Noble also has to consider the impact this is taking on the company’s overall business. For any business, this is an embarrassment but for Barnes & Noble, this could also signal that the company is having problems keeping up with the advanced publishing industry and it could meet the same end as Borders. Let’s make this clear: WSJ.com has not stated that Barnes & Noble is closing. As the only standing major “brick and mortar” bookstore, the Nook debacle will make some believe that it has shaved some years off the business.

Barnes & Noble is good at books but not at technology. They can make e-readers but is not prepared for the monetary sustainability of the e-reader business. They do not have the cash to throw behind the product and to compete with bigger competitors. This makes sense as to the reason the article mentions Microsoft and Google as possible investors (it seems any time a major tech product or company is being sold Microsoft and Google are always mentioned as potential sellers or investors). Article doesn’t mention when Barnes & Noble will make the decision but I would assume (and hope) before the 2012 holiday season.