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Is This the End for the Barnes & Noble NOOK?

By Daniel B. Kline – Mar 11, 2016 at 9:45AM

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The writing appears to be on the wall for the beleaguered e-book reader/tablet.

It's hard to remember but there was actually a point when the Barnes & Noble (BKS) NOOK loomed as a potential rival for Amazon's (AMZN -8.43%) Kindle.

Of course, even at its height NOOK never quite became Pepsi to Kindle's Coke or the Cyndi Lauper to its Madonna, but back in 2012 it was at least considered a two-company battle. Even back then the online retailer was the dominant player, but Barnes & Noble at least was in the game. At the time the traditional bookseller claimed 27% of e-book sales while Amazon had "at least 60%," TechCrunch reported.

Unfortunately for Barnes & Noble since that 2012 high-water mark prospects for the NOOK have slowly dimmed. The most obvious sign of that may have been that nothing came of Microsoft's (MSFT -2.36%) 2012 deal to buy 17.6% of a B&N subsidiary called NOOK Media for $300 million. At the time it was heavily rumored that the WIndows-maker might use the e-book/tablet platform owned by the bookseller as a way to launch low-end WIndows 8 tablets.

That, of course, never happened and while the poor reception for Win8 contributed to the failure of the Microsoft partnership it was mostly the quickly dawning realization that NOOK wasn't second in a two-team race, it was coming in last.

In December 2014 the book chain bought out Microsoft's stake in the NOOK division for $120 million, according to PC World. Throwing in the towel on that deal with a partner which in theory had the muscle to compete with Amazon might, in retrospect, have been the beginning of the end for the troubled e-reader/tablet.

Now, Barnes & Noble has decided to close the NOOK bookstore in the United Kingdom and that, coupled with comments made by CEO Ron Boire in the company's most-recent earnings release suggest NOOK may not be long for this retail world.

Barnes & Noble sells a number of NOOK devices. Source: Barnes & Noble

What is happening?
NOOK sales fall every quarter and the numbers have dipped so low they only get a few sentences in the company's Q3, 2016 earnings release.

NOOK sales of $51.7 million decreased 33.3% due primarily to lower device and content sales.  NOOK EBITDA losses of $11.2 million declined $17.9 million versus the prior year as the company continues to focus on cost rationalization efforts.

That statement makes it clear that it's no longer about growing sales when it comes to NOOK, it's about minimizing losses. Boire reiterated that point in his statement in the earnings release which also suggests what the new direction for the company's digital sales will be.

"While we still have significant work to do to improve sales at, we are encouraged by the site's improved performance during the quarter and are making investments to drive traffic and sales," he said. "I am also pleased with the progress that has been made to reduce NOOK losses. We remain committed to providing a great digital reading experience to our customers, while exploring all opportunities to further reduce losses.  Moving forward, our top priorities are growing bookstore and online sales, reducing retail and NOOK expenses and growing our membership base."

It's hard to read those words and know about the end of NOOK in the United Kingdom and think that the product has a future going forward.

What happens next?
NOOK has already lost to not only Amazon's Kindle device, but its app installed on tablets and smartphones sold by other companies. Barnes & Noble has no choice but to cut its losses and realize that it's fighting an impossible battle. Devoting any resources to NOOK and even giving it space in its stores make no sense.

The problem with ending NOOK is that it means the physical retailer has no e-book strategy and will be conceding defeat to Amazon. Unfortunately that's the only option because it's silly for the company to pretend its still a contender while throwing good money after bad. Barnes & Noble has waited too long to kill its e-reader/tablet and doing so now is really just a housekeeping move.

After NOOK Barnes & Noble needs to retrench and rebuild its business around physical product. It simply can't compete with Amazon in the digital space so it needs to build around the advantage it has in having actual locations. That means continuing to diversify its product base beyond books while leveraging staff expertise into sales. If it can do those things on as well then that sales channel can grow too.

NOOK was a noble effort, at least for a time, but it got crushed by Kindle. Barnes & Noble appears close to admitting that and moving on.

Daniel Kline owns shares of Microsoft. He uses a Kindle and owns a NOOK which he bought used and has never read a book on. The Motley Fool owns shares of and recommends The Motley Fool owns shares of Barnes & Noble. 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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