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New Nook Running Windows 8 Could be Boon for Barnes & Noble, Microsoft

By Daniel B. Kline – Mar 3, 2014 at 4:52AM

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Once left for dead, the Nook might rise from the ashes and become a player in the tablet market.

When Barnes & Noble (BKS) announced that it would turn manufacturing of its Nook color tablets over to third-party providers and then didn't release a new version in 2014, it seemed like the company had conceded in the tablet wars.

Turns out that's not the case. Barnes & Noble CEO Michael P. Huseby announced in the company's fiscal third quarter press release that it had not only narrowed its loss in the Nook division (which includes both e-readers and tablets), but would also be releasing a new Nook tablet in 2015.

"We have taken steps to reduce costs and device exposure, while focusing our efforts to reverse the content sales decline," Huseby said. "We remain committed to delivering world-class reading experiences to our customers through our reading centric e-Ink and color reading devices. The company is actively engaged in discussions with several world-class hardware partners related to device development as well as content packaging and distribution. As a result, we plan to launch a new Nook color device in early fiscal 2015."

Nook loses less money as sales decline
While lower losses for the division and the promise of a new Nook may have fans of the device excited, the smaller loss came on much lower sales.

The Nook division (which includes digital content, devices, and accessories) had revenues of $157 million for the quarter, decreasing 50.4% from a year ago. Device and accessories sales were $100 million for the quarter, a decrease of 58.2% from a year ago. This was due to lower unit selling volume and lower average selling prices, according to the company.  

Some of this sales decrease was by design.

"The company did not introduce any new tablet products this past holiday season, contributing to the third-quarter sales decline," Barnes & Noble said via press release. "Instead, the company executed its plan to sell through most of its existing device inventory, while also building additional tablet devices to meet holiday and post-holiday demand using previously acquired parts and components."

While this strategy likely cost the company long-term market share as customers bought new Kindles from Amazon (AMZN 1.26%), iPads from Apple (AAPL 1.56%), or Google (GOOGL 2.81%) Android devices from various providers, it did cut losses in the short term. "Nook losses decreased $129 million, or 67.5%, as compared to a year ago to $62 million," the company reported.

Market grows for e-readers
While Nook has had its growing pains, the market for e-readers and tablets has exploded. According to Pew Research Center, as of January "50% of Americans now have a dedicated handheld device – either a tablet computer like an iPad, or an e-reader such as a Kindle or Nook – for reading e-content. That figure has grown from 43% of adults who had either of those devices in September."

While many thought tablets would replace e-readers as customers opted for a more versatile device over the weight advantage of a dedicated e-reader, that has not happened. Ownership of both tablets and e-readers has increased.

"Some 42% of adults now own tablet computers, up from 34% in September. And the number of adults who own an e-book reading device like a Kindle or Nook reader jumped from 24% in September to 32% after the holidays," Pew reported.

What about the new Nook?
One of the most intriguing possibilities for a new Nook is that the company will release one running Microsoft's (MSFT 1.50%) Windows 8 operating system. Microsoft, as I wrote about in the article "Microsoft Takes Aim at Google With Windows 8 Price Cut," has not only cut the price of Windows 8 for its OEM partners it has also lowered the required device specifications; this makes a Windows 8 Nook seem feasible. Since Microsoft paid $300 million in April 2012 for a 17.6% stake in Nook, this marriage makes a lot of sense.

A Nook that runs Windows 8 -- perhaps with the Office suite or at least a stripped-down version of it being included for free -- would be a major differentiator for Barnes & Noble. With so many Kindle, iPad, and Android fans already entrenched with their device providers, a Windows 8 Nook might be just the thing to reach the 50% of people who don't already have tablets (but may have Windows computers.)

A little life left for Nook
Lowering your loss by selling off inventory and decreasing expenses while doing less business is not a growth strategy. Releasing a new Nook tablet powered by Windows 8 would be. Barnes & Noble won't succeed in the digital device game by following Amazon or Apple's lead. Instead, the company needs to innovate. Now it seems like it might be willing to do just that.

Finding a way to get more Nooks into customers' hands would ensure the survival of not just the Nook brand but its parent company as well. More Nooks -- be they readers or tablets -- means more sales of digital products. The importance of the Nook isn't in the sale of the device itself, it's in keeping book customers out of Amazon's Kindle universe.

Daniel Kline is long Microsoft. The Motley Fool recommends, Apple, and Google. The Motley Fool owns shares of, Apple, Barnes & Noble, Google, and Microsoft. 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.

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