Barnes & Noble Banks on Underperforming NOOK e-Reader
to Revitalize Declining Book Sales
To compete with Amazon’s popular Kindle e-reader, retailer Barnes & Noble continues to invest in its NOOK tablet, although profits have been lower than expected due to consumer preferences and higher tablet and content prices.
Since the launch of the first e-reader in 2009, both Barnes & Noble and Amazon have shifted their strategy away from selling print books to developing multi-channel strategies including online stores offering electronic content and book sales. Over the past three years, the content available to tablets has rapidly grown, with the NOOK bringing in $1 billion in sales in fiscal 2013.
Despite its prominence as the top storefront book retailer, Barnes & Noble has always fallen second to Amazon, facing a loss of nearly $69 million in 2012, its fifth consecutive year of decline despite sales increasing by 2% over the year. As the company aims to compete in the e-reader market, the costs of developing and improving the NOOK have driven up its expenses.
Barnes & Noble additionally faces costs to vendors who distribute the NOOK, who earn a commission on content sales. NOOK, one of the company’s three sectors along with Barnes & Noble Retails and Barnes & Noble College, faces an additional expense of paying publishers to acquire the rights to distribute content digitally.
According to the company’s SEC filing in March, publishers set fixed prices for electronic book content, with NOOK only receiving a fixed commission. Although popular book series like the “Harry Potter” children’s books and the “50 Shades of Grey” trilogy driving consumers to purchase content, sales have not been enough to offset the company’s debt.
Despite the company’s high expectations during and after the 2012 holiday season, NOOK sales were down 26% for the most recent fiscal quarter 2013 compared to the same period in 2012. NOOK expenditures in the same quarter were tripled, however, compared to a year prior. Overall company sales were down 9% in the most recent SEC filing compared to the sales of the same 2012 fiscal quarter.
Over the past six months, Barnes & Noble’s stock price has fluctuated, although the price has been on a fairly steady rise since February. However, in February 2011, the company halted its quarterly dividend payments in response to its steady net loss.
Despite its net loss and a disappointing last fiscal quarter, a recent investment by Pearson, a global learning company, in NOOK Media, a subsidiary of Barnes & Noble dedicated to online development and strategy has prompted the company to maintain an optimistic outlook on the future of its e-reader.
In January, Barnes & Noble reported that Pearson had completed its $89.5 million cash investment in NOOK Media, with the option to purchase additional ownership in the subsidiary. Microsoft also owns membership interest in NOOK Media.
According to the company’s press release, the investment will “accelerate customer access to digital content by pairing its leading expertise in online learning with NOOK Media’s expertise in reading technology, online commerce and customer service.” In accordance with the boosted confidence in the NOOK, a recent filing with the SEC disclosed that Barnes & Noble’s CEO, William Lynch Jr., will receive a $1.8 million bonus for the completion of transactions with Microsoft in the creation of the NOOK subsidiary, as well as for the Pearson investment.
Additionally, if Lynch is reassigned to the position of NOOK Media’s CEO in the future if the NOOK subsidiary eventually separates from the company, he will retain a cash bonus of $15 million.
The company has released eight versions of its e-reader, including the “NOOK 1st Edition,” “NOOK Wi-Fi 1st Edition,” “NOOK Color,” “NOOK Simple Touch,” “NOOK Tablet,” “NOOK Simple Touch with GlowLight,” “NOOK HD,” and “NOOK HD+.” NOOK devices have an estimated two year life span, a short period of time for some of the costlier devices.
The cheapest NOOK model, the NOOK 6 in simple touch starts at $79, and is the simplest model that most closely replicates the experience of reader a paper book. The priciest model, the NOOK HD+, begins at $269, and offers an HD screen, built in WiFi capabilities, and can play videos. Amazon’s e-readers are slightly cheaper than the NOOK, with the simplest version of the kindle starting at $69. Both models have similar interfaces, although the kindle weighs less than the NOOK.
The first level of HD models for both Amazon and Barnes & Noble both start at $199, but the Kindle Fire HD offers a front facing camera, while the NOOK HD does not have picture-taking capabilities.
The Kindle store’s prices for content in comparison with the NOOK store’s are nearly identical, as prices are set under an agency model by the publisher. The popular young adult novel, “The Fault in Our Stars” by John Green, retails at $10.99 on both online stores. The hardcover version sold on Amazon is $10.25, while the Barnes & Noble offered hardcover is $11.98.
The thriller “Gone Girl” by Gillian Flynn, retails at $12.99 for both a NOOK and kindle download, but the hardcover version costs $19.92 on Barnes & Noble, and $16.25 on Amazon. Although the e-reader content is nearly identical, consumer perceptions that Amazon books tend to be cheaper than Barnes & Noble’s may sway customers to purchase kindle devices instead.
Selected popular books are offered at a significantly reduced price for e-readers, as the digital version of “The Great Gatsby” is available on the NOOK store for only $2.99, far cheaper than the $13.05 paperback version. The prices of popular series, including children’s books, offered digitally are only slightly lower than the price of print books. The “Diary of a Wimpy Kid” series ranges from $7.50 to $9.39 online, with the hardcover books ranging from $8.49 to $10.86.
As a result, the combined price of both the e-reader and the cost of downloading content may dissuade some customers from purchasing a NOOK. Other devices, including Apple’s iPad and iPhone, also double as e-readers with apps like “Books” offering unlimited access to books by classic authors like Mark Twain, H.G. Wells and Charles Dickens for $0.99. The Apple Store also sells digital books at the same price as the NOOK and Kindle stores, in addition to audiobooks.
Although an e-reader may seem like a necessity in the growing digital age, the lower than expected performance of the NOOK illustrates that customers may prefer paper books to electronic downloads. E-readers offer user-friendly interfaces, but readers who prefer to take notes in margins or highlight continue to purchase regular books.
*All data in the story and graphs taken from SEC Filings
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