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Barnes & Noble, Inc. (BKS)’s Big Bet Isn’t Paying Off

Barnes & Noble, Inc. (NYSE:BKS)Barnes & Noble, Inc. (NYSE:BKS) appears to be accepting the fact that it’s just a book store. That’s an expensive pill to swallow and makes its future a lot more complicated.

Especially since Microsoft Corporation (NASDAQ:MSFT), Pearson Plc, and Liberty Media Corp. all own a piece of the company.

A Good Idea

Barnes & Noble, Inc. (NYSE:BKS) faced a technological moment of truth when, Inc. (NASDAQ:AMZN) destroyed the retail book store model and shifted it to digital delivery. Barnes & Noble was one of the few major chains left standing and had to make a choice between being just a book store or fighting, Inc. (NASDAQ:AMZN) again in digital books.

The company launched the Nook e-reader to compete with Amazon’s Kindle. From the start, Kindle was the leader. Although the Nook has received solid reviews, it simply never caught on., Inc. (NASDAQ:AMZN), meanwhile, has been able to build the Kindle line into a serious competitor to tablet computers. That has given the company a place at the table with companies like Apple Inc. (NASDAQ:AAPL) and Samsung.

Amazon’s top line has gone from around $5 billion a decade ago to over $60 billion last year. However, competition has required massive investment, leading profit margins to fall from the mid single digits to the low single digits. The Kindle is just one of many costly projects. Despite losing money last year, Amazon shares are trading near all-time highs and are only appropriate for aggressive growth investors.

Barnes & Noble, Inc. (NYSE:BKS), meanwhile, isn’t as big and technologically savvy as Amazon, and it’s finally admitting it. Based on bad sales results in the just ended quarter, Barnes & Noble, Inc. (NYSE:BKS) announced it was stopping production of color Nooks.

The problem that Barnes & Noble, Inc. (NYSE:BKS) faces now isn’t so much what comes next, but what came before. For example, Liberty Media has a 17% stake in the book retailer. And, to make matters more complicated, after the Liberty investment the company broke itself into two groups and took on a second round of investments for just the Nook business. The Nook business is partnered with Microsoft, which took a 16.6% stake in that unit, and Pearson PLC, which has a 5% stake.

Money to Burn

Microsoft Corporation (NASDAQ:MSFT)’s investment, which requires the company to keep giving Nook money for a few more years, now looks like a mistake. While there were rumors that Microsoft Corporation (NASDAQ:MSFT) was going to try to buy Nook, that didn’t pan out and shutting production of the color Nook seems to suggest that it never will. Luckily for Microsoft, the $300 million investment is small change compared to the over $60 billion in cash and investments it had, net of debt, at the end of the March quarter.

While this deal hasn’t played out very well, a similar high-risk investment in Nokia Corporation (ADR) (NYSE:NOK) has been a bigger success. Nokia Corporation (ADR) (NYSE:NOK)’s Lumia smart phone has been a great showcase for Windows Mobile. Although the Nook never offered that much promise, this type of low cost/high return investment is a good plan for a cash rich tech giant fighting to regain its industry leading position.

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