On Friday, Barnes & Noble (BKS +0.00%) made a marketing announcement that in Germany, on Windows 8.1, for a while, it would give away some free e-books and magazines. Customers can get a few freebies for downloading the Nook app onto their PC or tablet. It's a classic loss-leading sort of pitch, although there's very little loss in the new digital book age. Of course, the stock market was unmoved by this small gesture and -- no? The market was moved? Oh, I see -- the stock has jumped over 10% since Friday.
Investors are excited about this deal because it clarifies a path to success for the Nook. Microsoft's (MSFT +3.64%) continued commitment to the system seems to be the business's current saving grace. If Barnes & Noble change the face of its brand from the Nook tablet to the Nook app, it might grow the brand in a quicker and more efficient manner, relying on others to provide the tech that runs the app.
Take a look, it's in a Nook
Barnes & Noble has yet to make a big splash as a tech company. The Nook tablet received relatively solid reviews on launch, but its inability to keep pace with the iPad has made it an also-ran, at best. According to recent reports, Apple is still way out in front when it comes to tablets sold each quarter.
Instead of focusing on the hardware, Barnes & Noble's most recent decision seems to focus on making the Nook software and store the focus of the brand. That's a smart move, as the real money is in digital sales regardless of which device they end up on. While Apple made waves early on by locking customers into a physical and digital world, newer entrants to the market must realize that recreating the success of the iPod/iPad is unrealistic -- there are simply too many similar players.
The Nook is still sitting in the back seat, watching as the rest of Barnes & Noble cruises along. Last quarter, the Nook division lost $61.8 million before tax. That's not great, but it is better than the division had been doing. In the same quarter a year ago, for instance, the Nook division lost $190 million.
Nook potential
Despite its horrific results, the Nook does have a few things going for it. First and foremost has to be its ties to Microsoft. The software giant holds a 17% stake in the Nook division and it's still clearly interested in working with Barnes & Noble to make the Nook a success.
The second boon is the sheer size and continued existence of the Barnes & Noble retail store. While the company is pulling back on in-store Nook displays, it still provides users with free in-store borrowing, a place to buy accessories, and a constant reminder of the Nook brand to potential buyers.
Those two backings give the Nook a path to potential success we talked about earlier. By trying the free download idea out in a smaller market, Barnes & Noble can determine whether to roll it out in the U.S. That might open the door to a whole new set of users and customers who have no desire to own a Nook, but who want the reader functionality that the app provides. This is an excellent move for Barnes & Noble, and investors should look forward to seeing a similar tactic on domestic soil soon.
