Barnes & Noble (BKS) issued two devastating warnings about Nook revenue performance over the past two months. On Sunday night, a New York Times article stated that a person familiar with Barnes & Noble’s strategy believes “the company must move away from its program to engineer and build its own devices and focus more on licensing its content to other device makers.” B&N may reveal its plans to intensify partnerships with Samsung (005930) and Microsoft (MSFT) as soon as next Thursday.
This is a stunning development. Less than two months ago, the British publishing giant Pearson bought a stake in the Nook unit. Needless to say, the normally savvy Pearson would not have made the move had it realized the platform would be on its last legs by February. Poignantly, B&N reported 45% Nook revenue growth as recently as last summer. By January, the company was forced to issue an update revealing that over the Christmas period, revenue in the Nook unit had declined by double digits.
It’s a shocking reversal of fortune even though it has been obvious that Amazon (AMZN) is outperforming B&N in the eBook battle by quite a large margin. Any comment about relying more heavily on Samsung and Microsoft may well turn out to be lethal for Nook. The eBook business is built on confidence. Consumers want continuity. They need to feel that the investment they make on building a virtual library is safe for years to come.
A switch from using the dedicated, diverse Nook hardware platform to depending on a grab bag of third-party alternatives cannot be executed gracefully. Partners like Samsung are not likely to have much interest in focusing on Nook hardware development. Why would they put serious effort into a declining business? Samsung’s own tablet sales are growing at a triple-digit rate. Sure, it might feature a Nook app on its tablets, but that’s about it.
This could very well be a major win for Amazon, which now can try to raid the Nook customer base while sweeping the table when it comes to new consumers considering eBook reader purchases.
Amazon had a break-out Christmas in Europe, where its $200 tablets connected with recession-weary consumers. It now seems obvious that the Nook push into Europe will never happen. Amazon can try to fight off Asian low-end tablet vendors by stressing its rapidly expanding digital content empire in the sub-$200 price category that may well be the biggest growth engine of the entire tablet market in 2013.
The future for B&N looks mighty grim. Without Nook, it will probably become private equity fodder, to be chopped up and pared down ruthlessly and quickly. The mighty empire that crushed hundreds of independent book stores will be outlived by the most tenacious indie shops still clinging to life.