Barnes & Noble Looks Determined to Dump the Nook

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Last week, Barnes & Noble (NYSE: BKS) announced a buy-one-get-one-free sale on its Nook products. Specifically, if you buy a Nook HD+ sometime during the last week of March, you will receive a free Nook Simple Touch E ink reader.

Given the Nook’s struggles to compete with Amazon’s (NASDAQ: AMZN) Kindle, the end might be in sight for the bookseller’s tablets. What does this mean for Barnes & Noble shareholders?

Barnes & Noble’s founder doesn’t want the Nook business

Back in February, Barnes & Noble’s chairman and founder Leonard Riggio offered to purchase part of the company -- the non-Nook part. As an insider, it’s telling that Riggio has no interest in the Nook.

Riggio is the company’s largest shareholder, and as Bloomberg notes, was instrumental in pushing digital content. In fact, Barnes & Noble pioneered the digital e-reader market back in the 1990s by supporting the Rocket eBook.

Riggio, then, isn’t just a teary-eyed founder, wistful of the days of paper books. Rather, he’s been comfortable with digital media for some time. If Riggio’s throwing in the towel, perhaps investors should as well.

Nook has been badly beaten by Amazon’s Kindle

The first Nooks went on sale late in 2009 as a way for Barnes & Noble to compete against Amazon. Yet, despite getting a dedicated section at Barnes & Noble’s retail stores, the Nook has been badly beaten by Amazon’s Kindle. According to Localytics, Amazon’s Kindle Fire commands roughly one-third of the Android tablet market--Barnes & Noble’s Nook has just 10%.

The Kindle has a number of advantages over the Nook. Chief among these is Amazon’s Prime membership, which gives subscribers access to a vast library of free streaming content and the right to borrow books from Amazon’s lending library.

Despite Barnes & Noble’s flirtation with eBooks in the 90's, Amazon beat the company to the punch in recent years, and Barnes & Noble has been playing catch up ever since. What’s more, Amazon’s been promoting its devices as full-fledged tablets -- comparing the Kindle Fire HD directly with the iPad. Barnes & Noble’s Nook, on the other hand, has always been sold as a reader’s device.

Would a standalone Nook have any value?

If the Nook division was spun off, or if Riggio purchased the retail operation and left shareholders with just the Nook, there’s the question of if the unit has any actual value apart from Barnes & Noble.

A Barron’s article suggested that the Nook division could be worth as much as $16 per share, but that valuation was based off an investment from Microsoft (NASDAQ: MSFT)  When Microsoft put up $300 million last year, hopes were higher for Nook than they are today. What’s more, Microsoft may have made a generous investment simply predicated on the desire to toss a bomb at Amazon’s Kindle (and thus help Microsoft’s own Surface tablet).

Without a dedicated staff in every Barnes & Noble store pushing the Nook, how many devices would actually be sold? Why would consumers choose Nook over Kindle, particularly when Amazon has been so generous in its pricing?

Some may argue that book publishers have a vested interest in preventing Amazon from acquiring a de facto monopoly on digital books, but this would be a faulty argument. Google and Apple sell digital books in their respective media stores, books that can be read on a wide variety of tablets.

Would Microsoft buy Nook?

Some have suggested that, given Microsoft’s investment in the Nook, the tech giant could buy the division outright.

As Microsoft is now opening its own retail stores, it would have a dedicated place to sell the devices. Further, it would give it an alternative, cheaper tablet to its Surface Pro and Surface RT.

But if Microsoft bought rge Nook, it would be throwing good money after bad. Microsoft could make its own cheap tablets if it wanted. Buying the Nook would signal that Microsoft believed the brand had some value, a questionable proposition. Also, given that the Nook runs a modified version of Google’s Android, Microsoft may have to re-engineer the devices to run Windows 8, destroying any potential value gained from buying the Nook’s technology.

Do Barnes & Noble shareholders have a valuable asset?

Barnes & Noble shareholders are currently holding an asset of dubious quality. While Riggio may want the retail operation, he has no interest in Nook. Given Microsoft’s investment, it may want to go ahead and purchase the rest of the division outright, but it would make little strategic sense.

The bottom line is that investors in Barnes & Noble shouldn’t be expecting much from the Nook. Riggio’s purchase of the company’s retail operations could net shareholders some value, but the Nook won’t.

Joe Kurtz has no position in any stocks mentioned. The Motley Fool recommends The Motley Fool owns shares of and Microsoft. Try any of our Foolish newsletter services free for 30 days. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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