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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.
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.
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