Should Barnes & Noble Sell Nook?

Posted by · January 5, 2012 1:03 pm

Despite record sales in the 2011 holiday season, Barnes & Noble announced Thursday that it is considering the sale of its e-reader and tablet business. The announcement comes after the book retailer lowered its Nook sales forecast from $1.8 billion to $1.5 billion. Reacting to the announcement, investors began a massive selloff Thursday morning, sending Barnes & Noble share price down by more than 20 percent.

Discussing the potential sale of the Nook business, Barnes & Noble CEO William Lynch had the following to say:

We see substantial value in what we’ve built with our Nook business in only two years, and we believe it’s the right time to investigate our options to unlock that value. In Nook, we’ve established one of the world’s best retail platforms for the sale of digital copyright content. We have a large and growing installed base of millions of satisfied customers buying digital content from us, and we have a Nook business that’s growing rapidly year-over-year and should be approximately $1.5 billion in comparable sales this fiscal year. Between continued projected growth in the U.S., and the opportunity for Nook internationally in the next 12 months, we expect the business to continue to scale rapidly for the foreseeable future.

Though GigaOm’s Ryan Kim calls the Barnes & Noble CEO’s reasoning “understandable,” I am not so optimistic about the idea of offloading Nook.

Without Nook, Barnes & Noble runs the risk of losing what will ultimately become its primary means of selling content as book sales continue to tumble. As such, whittling itself down to little more than a traditional brick-and-mortar bookstore could prove disastrous. In other words, Nook is what separates Barnes & Noble from meeting the same fate that Borders did last year.

There’s no denying the fact that paper books are rapidly losing ground to e-books. In the first five months of 2011 alone, paper book sales dropped 20 percent as e-books soared an unprecedented 160 percent. As the holder of the second largest share of the e-books market—second only to Amazon, which holds 70 percent of the book market—Barnes & Noble cannot afford to place itself at an even greater disadvantage by getting rid of its only rival Amazon’s Kindle series of tablets and e-readers.

Moreover, if the Nook business is growing as rapidly as Lynch suggests, it seems counterintuitive to look into selling an asset with so much promise of future growth, not to mention market relevance. Even if the company is desperate for capital—which I’m assuming is the reason for the idea in the first place—a long-term approach to Barnes & Noble’s performance would suggest placing assets that enable the company to compete directly with the market leader off limits.

Instead of using resources to broaden its physical presence with more bookstores (700-plus already seems like too many in this increasingly digital age), why not save that capital and perhaps even look into selling some of that excessinfrastructure? This would prove advantageous both by refilling the company’s depleted coffers and upholding steady investment in Nook.

If taking Nook off the table is out of the question, my suggestion to Barnes & Noble would be to save itself the trouble of becoming the next Borders and instead put the entire company up for sale as it did in 2010. Perhaps this time, with a better developed Nook business, it will be able to attract the interest of someone with enough capital to make the company profitable and more competitive with Amazon.

As the company’s primary growth driver—and only hope for long-term viability—Nook should be what Barnes & Noble is raising capital for, not with.