Is the Nook Fighting a Losing Battle?

Barnes & Noble (NYSE: BKS  ) has fallen prey to the intense competition in the tablet and the e-reader space. While releasing sales data for its Nook tablets, the company stunned investors with the possibility of spinning-off its tablet business to unlock more value.

After the opening bell on Jan. 5, investors spared no time in hammering the stock down more than 30% to the single digits, though it did recover to the $10 mark later.

So, is the Nook dead? Well, I think it is!

Doomed from the beginning
In my opinion, the Nook was doomed from the get-go. I wasn't even a bit surprised when B&N lowered its sales forecast from $1.8 billion to $1.5 billion due to lower-than-expected demand. What do you expect when your closest rival clocks more sales per quarter than you do in a whole year?

So why is B&N contemplating a spinoff, you may ask?

Well, the Nook is downright unprofitable mainly because of the mountain of manufacturing and advertising costs the company has to incur to push it off the shelves. For the first nine months of 2011, B&N flushed down almost $50 million on advertising alone, more than triple of what it spent back in 2009. The company suffered both operating losses and net losses for the past three consecutive quarters. Ouch!

But that's not all. Unlike its rivals, B&N could not make enough money through traditional book sales to subsidize its tablet business. For instance, Amazon.com's (Nasdaq: AMZN  ) Kindle Fire tablet, which costs about $250 to manufacture, sells like hot cakes for just $199. The company makes up for this loss through sales of its vast collection of apps and multimedia content.

Now, B&N could go ahead and try to undercut the Kindle Fire. But it wouldn't stand a chance in a head-to-head battle with Amazon. Even cash-rich Apple (Nasdaq: AAPL  ) is feeling the heat from Amazon's fire-breathing Kindle. According to one analyst, almost 2 million fewer iPads were sold during the holidays due to Amazon's low-priced Kindle Fire, which was a hit with penny-pinching consumers.

Cursed if you do, cursed if you don't 
So finally, B&N felt it was logical to explore separating itself from the tablet business. And I feel that it could not have happened a moment too soon. Will the move make things better for B&N? I don't think so.

The spinoff would not make Amazon even take notice, as it would not make any game-changing difference to the Nook as a product. But the spinoff would destroy the little synergies the Nook currently enjoys with B&N. For example, the Nook would not be able to benefit from the good relations B&N has with publishers.

Had the cash-hungry Nook business stayed with B&N, it might have taken down the whole company together with itself. The tremendous costs involved with manufacturing and marketing would certainly take their toll. Plus, the company would also have to continuously upgrade the software and the hardware of the device to keep up with the times.

The Foolish bottom line
Barnes & Noble's plan for a spinoff won't be a game-changer for the Nook. Rather, I feel that if the tablet business were sold off completely, B&N might be able to stop bleeding cash and move on to what it does really well: selling physical books. For now, we'll wait and watch until the company comes out with further details. But for the long run, I feel that B&N minus the Nook would be better off.

So what do you Fools think about B&N's spinoff? Leave your comments in the box below. Also, don't forget to stay informed about B&N by adding it to your watchlist. It's free and lets you stay up to speed with the latest news and analysis for your favorite companies.

Fool contributor Keki Fatakia does not hold shares in any of the companies mentioned in this article. The Motley Fool owns shares of Amazon.com and Apple. Motley Fool newsletter services have recommended buying shares of Apple and Amazon.com. Motley Fool newsletter services have also recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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 disclosure policy.


Read/Post Comments (3) | Recommend This Article (12)

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 12, 2012, at 2:58 PM, avengergirl2010 wrote:

    Yup another article bashing BN and another moron who didn't do his homework before writing this dribble. BN's CEO made it clear on CNBC last friday they are not selling nook but looking for partners to put the device overseas too. He clearly stated that their is always going to be a tie to Nook and the stores as long as BN continues to sell ebooks. They are just looking at Seperate capitol for nook and not using the stores captiol for ads etc for nook. If you even paid attention he even said sales were up prior to christmas this past year too so obviously BN is doing something write. Why not write something were amazon isn't paying you to bash BN or nook this article is a waste of reading time.

  • Report this Comment On January 12, 2012, at 3:07 PM, EGTalbot wrote:

    I don't see anyway that B&N winds up decoupling the Nook from it's stores, as the previous commenter stated. There will still be the relationship with publishers, etc. In fact B&N has bet their entire business on their relationship with the Big 6 publishers and ebooks are a critical piece of that. The spinoff will either be neutral or helpful.

    The Nook may have lost money for a quarter, but the sales trends for books and ebooks tell the tale. Without ebooks, B&N will absolutely not survive. The physical book market is getting smaller on a daily basis. The idea that B&N would be better off without the Nook is. . .well I'll just stop there. Unless you're privy to some inside information that counters every shred of publicly available data on book sales, you should reconsider your conclusion.

  • Report this Comment On January 13, 2012, at 11:47 AM, sepaton wrote:

    Wow, every blogger in the Fool toolbox including Keki must be short BKS, it's never ending.

    Once again my prediction is that Amazon will be bankrupt within 4-years following the loss of their sales tax advantage.

    Also don't forget what AMZN's top products were/are:

    CD Music

    DVD Video

    Physical Books

    Electronics

    Toys/Games

    Revenue will be close to $0 on the first two items soon.

    Loss of sales tax advantage on the rest of what AMZN sells will finish them off.

    CLOUD you say? EC3?

    Yea good luck competing with Google, Apple, HP, and IBM... All real core technology companies, not some .com peddler that built their success on being the lowest price guy in town.

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