Barnes & Noble's Desperate Gamble

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Barnes & Noble (NYSE: BKS  ) is making an aggressive move in the ongoing battle for e-reader dominance and in the ongoing battle for the company's very survival, by offering two versions of its popular Nook readers at deep discounts. The more hands the company can get the device into now, the better off it will be in the future. The question is, can it make it through the now?

Buy a little of this, get a lot of that
Customers who purchase a one-year Nook subscription to The New York Times will be able to buy the Nook Color for $99, down from $199. Alternatively, they can get the Nook Simple Touch, the black and white version, for free, down from the normal $99.

Customers will be able to avail themselves of these offers at any of the company's retail locations, or online. The offers are good through March 9, 2012. The subscription to The New York Times is digital access only and costs $19.99 per year.

Digging itself out, or digging deeper?
B&N is in trouble. Though the most recent quarter has shown significant improvement, for the past three the company has been operating in the red, losing more and more ground to its primary nemesis, online-retailing behemoth (Nasdaq: AMZN  ) .

B&N's deep-discount, e-reader move is similar to Amazon's Kindle strategy; that is, sell the hardware at cost, or maybe even at a loss, to draw consumers into the companies' proprietary products-and-services ecosystem, where the real money is. But there are important differences between the two companies' approaches.

First, Amazon may be selling its Kindles at cost, or even at a small loss, but it's not giving the equipment away and therefore taking a total loss on it. This might be too big of a pill for the already struggling B&N to swallow.

Second, Amazon's Kindle Fire, its upper-end model, straddles the line between e-reader and full-on tablet computer. The Kindle Fire, in fact, is now viewed as a potential rival for Apple's groundbreaking and immensely popular iPad. The jury is still out as to whether the Kindle will in fact challenge the iPad's dominance in the market, but the Nook Color isn't even in the running.

That light at the end of the tunnel is a train
Also of note in recent Barnes & Noble news are definite plans to sell its publishing arm, Sterling Publishing, and possible plans to spin off the Nook business into its own separate entity. The Nook business is B&N's one remaining silver lining to the dark clouds of Internet commerce and digital publishing that have been hanging over its business for a decade now. Breaking it away from all the perceptual and financial baggage that is Barnes & Noble could unlock real value for the Nook brand and for investors.

That said, selling the Nook at such a deep discount is a Hail Mary pass for the company as it currently exists. Unless B&N finds some way to get into the full-on tablet game with the Kindle Fire and the iPad, even if it splits off Nook I think the company is in for a rough ride at best.

Barnes & Noble might be poorly positioned to cash in on the booming tablet markets right now, but the stocks in this Motley Fool special free report, "3 Hidden Winners of the iPhone, iPad, and Android Revolution, are in perfect position. Get your copy while it's hot.

Fool contributor John Grgurich still enjoys the ancient practice of browsing actual books on an actual shelf in an actual bookstore, but he owns no shares of any of the companies mentioned in this column. The Motley Fool, however, owns shares of and Apple. Motley Fool newsletter services have recommended buying shares of and Apple and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a scintillating disclosure policy.

Read/Post Comments (4) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 10, 2012, at 12:26 AM, foolindeed1 wrote:

    Again, a load of poison-filled load of Amazon-paid analysis from Fools - nothing new, passing through... I especially love your comparing of Kindle Fire to iPad - I can only laugh. Reported issues with Kindle Fire are it runs hot to touch, video playback is jerky, touch screen is not responsive and it takes 2-3 touches to register, power button placement is very poor and is prone to accidental power off, all the hype of Silk browser is not true where the browsing is actually slower than on other Android tablets, etc.

    according to Consumer Reports, CNET, PCWORLD, etc. pro reviews and recommendations the best eReader is Nook Simple Touch at $99 without ads - twice the battery life, faster page turn that Kindle Touch ($139 without ads.), and microSD slot for extra capacity (not on any Kindle.)

  • Report this Comment On January 10, 2012, at 1:16 AM, foolindeed1 wrote:

    Nook Tablet has Netflix, Hulu, Pandora, Angry Brids, etc., the best battery life (30% better than Fire), the best non-glare laminated screen (visibly noticeable difference in side by side tests in video playback and EBooks reading), double the RAM and space for apps/photos/movies, microSD slot (not on Kindle) and a microphone for Skype (not on Kindle), physical volume controls on the side (not on Kindle), and much zippier performance during video playback and apps usage than choppy/laggy act of Kindle Fire according to many user reviews. Nook tablet is a bit lighter than Kindle Fire as well.

  • Report this Comment On January 10, 2012, at 1:30 AM, Popnfresh100 wrote:

    "First, Amazon may be selling its Kindles at cost, or even at a small loss, but it's not giving the equipment away and therefore taking a total loss on it. This might be too big of a pill for the already struggling B&N to swallow."

    I think you have this backwards. The New York Times is a $20/ month subscription. That's a $240 purchase, $81 (roughly the cost of the ereader) of which would go to Barnes and Noble if someone just purchases a nook and signs up for a digital subscription.

    So this is more like a clever financing/ marketing deal rather than a company selling at a loss. Instead of asking a digital subscriber to pony up cash for the nook themselves and then paying Barnes and Noble $81 over the course of two years, the New York Times simply buys the nook from Barnes and Noble for $99 upfront and Barnes and Noble agrees to forgo their cut of the profits from that customer.

    NYT prefers this arrangement because it is a good marketing ploy - many more customers will subscribe to NYT digital on the nook than otherwise would because Barnes and Noble is effectively subsidizing their purchase.

    Theoretically, Barnes and Noble is losing $81 if someone was going to buy the nook and subscribe to the NYT anyways. But there's a big difference between an opportunity cost and a cash loss.

    This is a big plus for a cash-strapped company like BKS. And on top of that- it effectively nullifies Amazon's sales tax advantage since digital subscriptions are not taxed EVEN if the nook is "purchased" in a store.

    Those two benefits aren't applicable for Amazon- a company with plenty of cash and no sales tax anyways.

    Amazon's ad-supported model, however, means that Amazon, and noone else, is ponying up the dough for the subsidized Kindle. I doubt advertisers have any incentive to pay Amazon upfront.

  • Report this Comment On January 10, 2012, at 9:23 AM, rdare wrote:

    Fools "articles" belong on yahoo message boards. I wonder if writers are over 20. Recently, I've also been getting right-wing spam in my email from them, which is totally inappropriate. This idea of having random people post things as articles will hurt fools long term as they are squandering the trust the company was trying to build for years back 10-20 years ago.

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