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Is the Nook Spin-Off a Hint of Underlying Problems for E-Readers and Amazon.com?

By Tyler Lacoma - Jul 7, 2014 at 7:45PM

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Good news for Barnes & Noble, bad news for those invested in e-reader market.

Image by Flickr user Eric Grossnickle

The Nook may be heading for the cutting room floor sooner than expected. Barnes & Noble ( BKS ) has announced that it will spin off its e-reader as a separate public company, probably in early 2015 . Barnes & Noble shares responded with a 7% leap  following the news, a bonus following the total 40% gain seen since 2014 began.

Investors responded positively to the news because the Nook has been looking like a failure for some time, with quarterly revenue decreasing more than 22% year over year and total fiscal revenue falling by 35.2% in 2013. While the Nook will be a public company, investor interest is unlikely; Nook has a slim chance of surviving as its own business as it faces declining demand and fierce competition in most areas except textbook sales.

Ultimately, this spinoff is a symptom of the problems that all e-readers are facing in the changing market, problems that could force even Amazon.com ( AMZN -0.00% ) and others to alter their approach.

Dominant e-readers face challenges
If e-readers have a future, it is probably through the most successful products like Amazon's Kindle line. Apple ( AAPL 2.28% ) is staying away from a dedicated reader device thus far. Kindle devices themselves brought Amazon about $3.9 billion revenue in 2013 .

However, even the Kindle's lifespan may be limited. The rise of the iPad, Kindle Fire, and other tablet computers has made the e-reader a little irrelevant. Apps for the Nook, Kindle, and many other e-reader are available on these tablets, and these apps are getting even easier to use. Why take two screens on vacation when you only need one? Some remain fans of the readability that e-ink offers in sunlight, but buying a separate device for that solo benefit is a tough sell. The latest Forrester  research predicts that e-reader sales will fall from 25 million sold in 2012 to 7 million sold in 2017 because trends like this.

Numbers also point to waning interest in e-books in general. Sales revenue has been flat, around $3 billion , for the past couple of years. Sony  has already given up on selling e-books in North America and has dropped its Reader line in favor of tablets. Amazon  is dropping prices on devices like the Kindle DX. Apple is keeping quiet  on its numbers, but has recently reached a settlement for its e-book lawsuit  and appears intent on providing Amazon with more app-based competition.

The rise of Netflix-like services
Another problem with e-books is the challenge provided by alternative services like Oyster and Scribd. Both of these companies offer a Netflix-like arrangement where you pay a monthly fee and get app-based access to a digital library -- 400,000 titles in the case of Scribd and 500,000 for Oyster. Consumers can also pay a little more and get services like Entitle , which offers new releases from major publishers like HarperCollins and allows people to permanently keep the books they choose.

All of these services are working on developing more contracts with big publishers, and their recent success may offer a reason why direct e-book sales are falling. Oyster started 2014 with a $14 million  funding round, and that was back when it only offered 100,000 titles, while Scribd appears on the path to an IPO. All companies in this group are sapping e-book revenue from big sellers.

In other words, placing big bets on the future of e-readers could be dangerous, and e-book revenue may not be as dependable as publishers or companies like Amazon wish. The market is more diverse than it was and could offer a second chance for floundering companies. If the Nook wants to survive the coming years, its solution might lie in one of these e-book alternatives.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
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Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$3,523.16 (-0.00%) $0.13
Barnes & Noble, Inc. Stock Quote
Barnes & Noble, Inc.
BKS

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