In today’s technologically advanced world, e-books are all the rage. After all, they are certainly more convenient than plain old fashioned books, and are usually cheaper. That being said some people, myself included, find that physical books have a certain charm that digital ones will never be able to replicate. I have always dreamed of assembling a library of my own favorite books. To start making that dream a reality, I recently paid a visit to Barnes & Noble, Inc. (NYSE:BKS).
By the time I was through I had bought several books, and definitely found the experience satisfying. And whenever I leave a business feeling satisfied, I know it’s time to do some research. It was obvious that the book industry is undergoing some radical changes, changes that could mean a death sentence for purveyors of physical books–we all know what happened to Borders. Still, I wanted to see if things were really as bad as they seemed for B&N. For the most part they were, but there was a silver lining to be found.
How Barnes and Noble makes, and loses, money
Barnes & Noble, Inc. (NYSE:BKS) operates in three segments. Retail is by far the largest segment, accounting for over two-thirds of revenue. About 25% of revenues come from agreements Barnes & Noble has struck with colleges to operate the bookstore on campus.
Then finally there is the Nook division, which has been hemorrhaging money. The following chart details just how harmful the Nook business has been to Barnes & Noble, Inc. (NYSE:BKS) since its inception in November of 2009. (Note that fiscal years here are as Barnes & Noble presents them in their annual reports, meaning they end in April)
|Year||Operating Profit (Loss)|
Wow, that is one terrible segment! For the year ended April 2011, sales for the Nook segment were up 589.1%, and losses more than doubled! Whenever a sales increase like that correlates with bigger losses, in any segment anywhere, management ought to give serious thought to ceasing those operations. And I’m sure management at Barnes & Noble, Inc. (NYSE:BKS) has spent long hours pondering doing just that.
Why the Nook is failing
Barnes & Noble, Inc. (NYSE:BKS) is getting absolutely obliterated in the battle for e-reader supremacy by the juggernaut that is Amazon.com, Inc. (NASDAQ:AMZN). In the latest quarter sales of Nook sales were down 34%. Meanwhile, Amazon.com, Inc. (NASDAQ:AMZN)’s immensely popular Kindle has actually been gaining market share in the immensely competitive tablet market.
One possible reason the Nook is failing so badly is its inherent inferiority to other tablets out there. While they doesn’t move at a snails pace, the processors in e-readers are much slower than those in a traditional tablet. The Nook also has no built in web browser (the kindle fire does). Apparently most people would much rather shell out more money for a tablet instead of just buying an e-reader.
Finally, Barnes and Noble’s advertising muscles look puny, downright pathetic, compared to Amazon’s. The main place Barnes and Noble advertises its e-reader is in physical book stores, something people just don’t seem to be visiting as often anymore. They would much rather just buy books, physical or electronic, off of the internet, and we all know where they go to do that.
Getting cozy with Microsoft Corporation (NASDAQ:MSFT)
The decision management at B & N has reached regarding the Nook was to partner with Microsoft Corporation (NASDAQ:MSFT) and spin the Nook and college bookstore divisions off into a separate enterprise.
Microsoft paid $300 million for a 16.8% stake in this new business, with the remainder being controlled by Barnes & Noble. I have no idea why Microsoft would pay so much for a division that has performed so poorly. In my eyes its a desperation move, one that brings the Peter Lynch term “diworsification” to mind.