Barnes & Noble Takes Ebooks Battle to Another Front
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Book retailer Barnes & Noble (NYSE: BKS) this week announced that it has decided to open another front in its ongoing battle with Amazon.com (NASDAQ: AMZN) for share in the rapidly growing e-reader and e-book market. For the first time in its 95-year history, the company is expanding overseas. It will begin selling its Nook e-book reader in the U.K. in October through both an online store and the physical stores of U.K. retailer John Lewis. Amazon has had a U.K. presence for many years and has a deal with U.K. retailer Waterstones to sell its Kindle devices.
The company had indicated it would begin a strong international expansion in April when Microsoft (NASDAQ: MSFT) bought a minority stake in its Nook unit for $300 million. The Nook subsidiary will develop a Nook application based on the Barnes & Noble Nook ebook platform for its Windows 8 operating system launching later this year.
Barnes & Noble surely needs Microsoft's financial muscle and expertise in selling overseas since Amazon still dominates the market for e-books and e-readers at home. Estimates are that Amazon has more than 60 percent of the U.S. e-book market while the company estimates its market share to be between 25 and 30 percent. In the latest quarter, Nook revenues held steady at $192 million with a 46 percent rise in digital content revenue offsetting a decline in revenue from Nook e-readers. Barnes & Noble has had to lower the price of Nook e-readers in order to compete better with Amazon's Kindle.
The international expansion makes a lot of sense. Most in the e-book industry believe that overseas markets are two years behind the U.S. in the adoption of e-books. Those foreign markets are definitely worth going after. Look at Europe, for instance. In the UK, e-book sales have been growing at the same rate as in the United States. Adoption has been slower in Europe itself but that may be a good thing for Barnes & Noble, almost virgin territory. E-Books account for less than 2 percent of the book market in France and Germany, according to research firm Sebastopol.
PriceWaterHouse Coopers says that e-book sales in Europe will grow by 113 percent in 2012. Contrast that to a gain in US consumer e-book sales of 42 percent to $2.5 billion or 11 percent of the overall consumer book market. And in Asia, e-book penetration is also very low at 6 percent. No wonder Barnes & Noble chief executive officer William Lynch said, “It's the first inning in all those markets.”
International expansion is definitely one item Barnes & Noble needs. Another would be some help on the hardware side with a major partner. The company is struggling to keep up with innovations from Apple (NASDAQ: AAPL) and its iPad. A major worry for Barnes & Noble is what happens to its Nook e-readers when Apple comes out with a smaller version of the iPad which would erase the thin line between tablets and e-readers. Of course, rumors of a smaller iPad have been around for years. But sooner or later, Barnes & Noble knows it will happen.
So to compete it needs to team up with a major hardware partner. Is that Microsoft now that it is moving into hardware with its Surface tablet? Or would it be better to team with someone like Hewlett Packard (NYSE: HPQ) or one of the many major Asian manufacturers? Best guess here is that Barnes & Noble will stick with Microsoft. After all, HP apparently doesn't 'get' the tablet market. It wasn't too successful with its Touchpad tablet and was forced to discontinue it. But an Asian manufacturer is still a distinct possibility.
The Motley Fool owns shares of Apple, Amazon.com, and Microsoft. tdalmoe has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, and Microsoft. Motley Fool newsletter services recommend Amazon.com and Apple. 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.If you have questions about this post or the Fool’s blog network, click here for information.
