The 1 Thing That Can Save Barnes & Noble

The iPhone 5 launch on Wednesday, Sept. 12, is sure to be the most important event for tech investors this year. The Motley Fool will be hosting a live chat where our top tech analysts will answer your questions and break down what the announcement means for Apple and tech investors everywhere. Be sure to swing by Fool.com at 12:45 p.m. ET next Wednesday for all your coverage of Apple's next big announcement.

Barnes & Noble (NYSE: BKS  ) has a problem. It starts with the letter "B" and ends with the letter "S." It's five letters long, and it's not "books."

No, the struggling bookseller continues to butt heads with Bezos. Amazon.com's (Nasdaq: AMZN  ) determined CEO, Jeff Bezos, just rolled out a line of Kindle e-readers and tablets with so many features at such low price points that Barnes & Noble's Nook simply can't hope to compete.

Winning the price war by laying down your arms
Some don't necessarily see it that way. Stifel Nicolaus analyst David Schick chimed in on Friday with a view that isn't as bleak. He has a neutral rating on the bookstore chain, though he, too, is concerned that the "rapid pace of innovation" will force Barnes & Noble to continue investing in its Nook platform. Adding insult to injury, the price war is never going to end, as companies with smarter ecosystems go for the jugular.

If that's the case, how can anyone truly be merely neutral on the retailer? There's nothing it can put out that Amazon can't improve upon and sell for $20 to $50 less. Bezos is crazy like a fox. He'll take a hit on the hardware, knowing he can make up the difference digitally through his company's much larger customer base.

Things don't look good -- but Barnes & Noble does have a way out.

Paging Mr. Softy
Microsoft (Nasdaq: MSFT  ) , a company that's been known to throw billions at lost causes to champion their businesses, turned heads in May, when it offered to invest $300 million for a 17.6% stake in Barnes & Noble's college bookstore and Nook business.

What was Microsoft thinking? Was it thinking e-books are a shoehorn to mobile operating systems, where it's sorely lagging Android and Apple's (Nasdaq: AAPL  ) iOS? After all, if Microsoft didn't want to compete against Android and Apple, it wouldn't be paying Nokia (NYSE: NOK  ) billions to champion its Windows Phone platform. Or was the software giant merely thinking e-readers represent a new way for rudimentary computing and it might as well start getting its foot in the door before it's too late?

Does it matter?

Before things get out of hand, Barnes & Noble should approach Mr. Softy and simply sell its Nook business. All of it. It can keep a symbolic minority stake if it's sentimental that way, but it should lose the money-losing albatross that the Nook has become and will continue to be. And the company should do it now, while the Nook is still worth something.

Sure, bricks-and-mortar bookstores are fading, but at least they're still profitable and seasonally potent. Absent the Nook distraction, Barnes & Noble can focus on expanding its selection beyond media items that will continue to be digitally displaced. Add more toys. Host writing classes. Expand the cafes and offer nightly one-act plays. Host book clubs. Introduce a gaming element that can only be done in-store. Whatever.

Microsoft doesn't have a problem cutting big checks to handset makers and search engines to overcome its organic shortcomings. Barnes & Noble has a golden opportunity to snag the next big check. Take the money and run, Barnes & Noble. You know how this will all end in a few years if you don't.

Mobile madness
The popularity of e-readers, smartphones, and tablets opens the door for some surprising Wall Street beneficiaries. Read up on three hidden winners in a free report. If you wait for the report to show up on your Nook, you may be too late to the party, so check it out now.

A new premium report on Microsoft dives into the software leader's challenges and opportunities. The premium research includes a year of free updates.

The Motley Fool owns shares of Apple, Microsoft, and Amazon.com. Motley Fool newsletter services have recommended buying shares of Microsoft, Amazon.com, and Apple, writing puts on Barnes & Noble, creating a bull call spread position in Apple, and creating a synthetic covered call position in Microsoft. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz does not own shares in any of the other stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (2)

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 September 09, 2012, at 8:24 PM, Peter269 wrote:

    As a publisher who sells to BN, I disagree with your "solutions" all around.

    First, research is finding that BN customers use the Cafe as a mini-library and don't always buy something (you know, like a book), when visiting.

    Second, research also shows that customers use outlets like BN as showrooms for price checking and then buy online, not always from BN.

    Third, research shows that more and more book sales are digital.

    What BN needs to do is get more aggressively in the game. It already has a publishing division for PD and other specialty titles, but it's not pursuing authors like Amazon. So here's a place BN had a structure in place and didn't move more quickly on it.

    BN must move on the Nook or it will go out of business by default.

    Next, BN must throw aside some hubris and get friendly with publishers who bank the chain with free floor planning, meaning, seeing a check sooner than 6 months can be seen as a miracle vs. getting paid in 30 days from other vendors.

    Finally, as book friendly as the store is, the web site isn't. It just doesn't have the same number or caliber of reviews you find at Amazon, nor does it get book sale referrals on various TV programs like Amazon does.

    BN is fixable and viable. But the management seems stuck in yesterday with middle aged thinking.

  • Report this Comment On September 10, 2012, at 8:44 AM, foolindeed1 wrote:

    This article is brought to you by our sponsors: Amazon.com!

  • Report this Comment On September 11, 2012, at 10:08 AM, tweenthelines wrote:

    Soon, if not already, pads, readers, phones will become low priced commodities. BN strength is with its stores.

Add your comment.

DocumentId: 2010703, ~/Articles/ArticleHandler.aspx, 4/24/2014 2:01:54 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement