A decade after Barnes & Noble turned its once-troubled web site into one of the most successful e-bookstores in the world, investors are scratching their heads as the retail store once again considers losing full ownership of a book-related business with red-hot potential.
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The bookseller said last week it is weighing strategic options for its popular Nook, including a possible sale or spin-off, to capitalize on its rapid growth and favorable leadership position.
The review has some questioning whether Barnes & Noble could survive on its own.
This isn’t the first time Barnes & Noble (NYSE:BKS) has considered operating one of its branded businesses externally. In the 1990’s, it took a minority share of BarnesandNoble.com, which launched as an independent public company to rival Amazon (NASDAQ:AMZN).
“If they do spin it off, I would consider going in a different direction than just Nook, because that’s too confining at this point.”
Just as it ultimately became clear the lone dotcom brand couldn’t thrive on its own, leading Barnes & Noble to acquire it in 2003 in what turned out to be one of its smartest plays, analysts are concerned separating the Nook business would lead to a strategic failure, similar to that seen when Borders famously outsourced its web site to Amazon in 2001, a misstep that has been blamed partly for its recent bankruptcy.
BN.com has turned into a role model for e-bookstores since the retail store took it over, showing how well physical books and the digital world can interact when operated together as one. Likewise, the e-reader has been revolutionary for the bookseller, playing a large part in giving Barnes & Noble an edge over its now bankrupt rival and catapulting it into a digital world dominated by Amazon.
The Nook brought it up to speed as demand for electronic books started outpacing sales of physical books, and many analysts are now wondering how Barnes & Noble will survive in today's economic environment if it splits from its most successful, cutting-edge business.
“I don’t think it’ll provide much of a benefit if they do go through with this,” said Michael Norris, senior analyst of the trade books group at Simba Information.
While Norris said he can see the attraction of wanting to sell a part of the business due to the rapid growth pace, he can’t pinpoint how it would bring value to the physical Barnes & Noble stores whose revenues have become largely dependent on the popular device.
Nook sales grew 70% year-over-year in December and the e-reader is expected to bring in about $1.5 billion in comparable sales this fiscal year.
However, others say this may be the only plausible step to keep the Nook ahead of competition as the industry heats up. Strategy expert Rich Horwath said Barnes & Noble has reached a “strategic inflection point,” where it needs to decide whether it’s going to remain a retailer, or move full-fledged into the technology business.
“They need to make a decision whether they’re going to be all in on technology, or, if not, spin it off and have the experts run it,” Horwath said, who serves as president of the Strategic Thinking Institute.
Could Barnes & Noble be the Next Big Tech Firm?
As opposed to BN.com, the Nook doesn’t have as many synergies with Barnes & Noble retail stores, Horwath said, thus its spin-off makes much more strategic sense.
There's a plausible chance, though, Nook won’t be successful as a stand-alone e-reader company, he said, calling the device “simply a tactic” under the traditional Barnes & Noble brand.
It would need to spin off and develop into a diversified technology company, perhaps by utilizing a technology that would allow it to develop a slew of new, compatible devices, branching off the core brand, similar to what Apple (NASDAQ:AAPL) has done with its operating system.
“One piece of technology today isn’t going to win the game,” Horwath said. “If they do spin it off, I would consider going in a different direction than just Nook, because that’s too confining at this point.”
Perhaps that is a challenge that Barnes & Noble may want to take, especially as traditional bookstores become less relevant in today’s electronic book market.
“When you lose the convenience aspect, the question you have to ask is how long is the Barnes & Noble store going to be of value to people?” Horwath said, who predicted it will only last 10 years max. “If that fades out, what’s your next phase?”
Since people have an affinity for the Barnes & Noble brand, it may make the most sense to separate out the technology business led by Nook, and try and dominate the market as a traditional bookseller with a strong dotcom business model, he said.
While the bookseller has not given details on the strategic review, it says it is in talks with publishers, retailers and technology companies in international markets that may be able to expand the Nook business abroad.
In an interview with the Associated Press, CEO Bill Lynch said the Nook review is an attempt to provide more visibility into the unit’s operations, which the company believes are undervalued.
“We want to unlock value and shine a bright light on that business,” Lynch said in an interview with the Associated Press.
Norris said the company may think having Nook operate alone would look attractive to shareholders. The company did not respond to a request for a comment regarding this story.
The Hypothetical Realities of a Sale
If Barnes and Noble decides to sell all or a part of the Nook business, Norris said he could see the bookseller buying it back within the decade, just as it did with the dotcom brand.
Separating Nook would bring a host of challenges, including thorny questions over how the spun-off company would operate. Would Bill Lynch lead it? Would it still be a part of Barnes and Noble operations? Would it trade on its own and have separate finances?
If such a deal were to take place, Barnes & Noble would most likely own a large chunk of the new entity, which means it would indirectly benefit from Nook sales. However, the two would operate separately, which means double the manpower and expenses, and fewer synergies.
“Borders didn’t have all the smart people in one room, so they couldn’t make it work,” Norris said. “Barnes & Noble today do have all smart people in one room, and I think they should keep it that way.”
On-the-other-hand, it may make sense to split the company and give the Nook business to the experts of technology that can help turn it into a market leader that more directly competes with Amazon and Apple.
Horwath says Barnes & Noble needs to answer one strategic question – Does it have core competencies and assets to compete in technology?
“If they think they do, they need to compete full-fledged there,” he said. If not, “spin it off and allow people that do have those assets to come in and run the business.”