Updated June 25, 2013, 7:05 p.m. ET
Barnes & Noble Pulls Back After Losses In Tablet Wars

By
JEFFREY A. TRACHTENBERG
CONNECT

After spending hundreds of millions of dollars in an effort to compete with Amazon.com Inc. AMZN +2.01% and Apple Inc. AAPL -1.13% in the market for tablets and e-readers, Barnes & Noble Inc. BKS +5.45% is beating a retreat.
The bookseller said Tuesday that losses at its Nook digital business more than doubled in the quarter ended April 27, easily wiping out profits generated at its bookstores. As a result, Barnes & Noble said it would stop producing its own color tablets, in favor of co-branded devices made by third-party manufacturers.
Barnes & Noble will continue to design and make its own black-and-white Nook e-readers, which account for the majority of its e-book sales. But with e-reader sales expected to decline over time, it is unclear how competitive Barnes & Noble can be long term without its own presence in the tablet market, which is forecast to keep growing.
Barnes & Noble shares sank 17% in Tuesday trading, to $15.61 at 4 p.m. on the New York Stock Exchange.
The decision to change course on tablets is a blow for Chief Executive William Lynch, a technology veteran whose career includes a previous stint at Palm Inc. He took the reins at Barnes & Noble three years ago and orchestrated the push in digital book-selling. He directed its Nook device efforts as well, often personally introducing new devices at press galas.
The results intensify uncertainty about the future of Barnes & Noble, which is grappling with a shrinking print book market and an intensely competitive e-book market where a recent government antitrust settlement has allowed Amazon and other retailers to discount many titles again after a hiatus of several years.
Barnes & Noble still makes money from its retail stores, partly by diversifying into toys, games and other products, but it has said it expects to shrink its store count over the next decade by a third.
In February the company said its chairman and biggest shareholder, Leonard Riggio, planned to make an offer to buy the retail stores. That deal would have left Barnes & Noble's Nook Media, a unit that also includes its 686 college bookstores, as the company's surviving business.
The company has said nothing about the status of that offer since. It refused Tuesday to give any update. Mr. Riggio declined to comment.
Signs of Barnes & Noble's struggle in the tablet war had been growing over the past year, but Mr. Lynch said the Nook's latest losses were "much higher" than previous expectations. Nook revenue fell 34% to $108 million, as sales of its new HD tablets fell short of forecasts.
The division's loss before interest, taxes, depreciation and amortization widened to $177 million from $77 million a year earlier. The latest-period losses included $133 million of charges to write off unsold inventory.
Although the Nook often received good grades from critics, it didn't offer as many choices of apps, movies and music as rivals. Barnes & Noble tried to address this in early May when it added Google Inc.'s GOOG +0.86% Android app store and other Google services to the Nook.
Barnes & Noble's modest marketing efforts and smaller customer base made its efforts more challenging. Meanwhile, prices for tablets and e-readers have declined sharply, putting pressure on the retailer.
"Barnes & Noble was attempting a very ambitious pivot from being a book retailer to being a consumer electronics manufacturer and retailer," said Sarah Rotman Epps, an analyst at Forrester Research Inc. FORR +0.16% "They never had the customer base. Some followed them, but not enough. The hardware wasn't the problem."
Ms. Epps also said "Barnes & Noble doesn't have Apple's resources."
As for the bookseller's bet on black-and-white e-readers, Ms. Epps sounded a discouraging note, saying that Forrester sees that as a declining market over the next five years. Forrester expects sales of dedicated e-reader devices sold in the U.S. will decline to 2.3 million units in 2017 from 5.8 million units in 2013. By contrast, U.S. tablet sales are expected to increase to 83 million in 2017 from 56 million tablets in 2013.
To buttress its resources, Barnes & Noble in 2012 created a new company, Nook Media LLC, to house its college bookstores and the Nook business and to bring in money from outside investors. Microsoft Corp. MSFT +2.02% pledged a total of $605 million, including an equity investment of $300 million, while PearsonPSON.LN +0.09% PLC put in $89.5 million, giving Nook Media a solid financial cushion. But it is unclear whether either company will make a more substantial Nook bet in coming months.
Pearson said, "Our investment in the B&N Nook media platform continues to align with our strategy to create a more seamless educational and e-commerce experience for students and faculty—expanding access to digital content."
Microsoft didn't have an immediate comment.
John Tinker, an analyst at Maxim Group, questioned the value in a Nook color tablet manufactured by a third party. "What this quarter showed is that people are still buying books, but that they aren't going to buy tablets that offer video from a book retailer."
A spokeswoman for Barnes & Noble declined to comment.
Until now Barnes & Noble has been able to comfortably offset losses at the Nook business with profits at its bookstores. But that mix changed in fiscal 2013. For the full year, the Nook had Ebitda losses of $475.4 million, offset by positive Ebitda of $485 million from the retail and college stores. In fiscal 2012 the Nook had Ebitda losses of $261.7 million while the stores generated Ebitda of $438 million.
Weaker Nook sales also hurt results at Barnes & Noble's retail store business, where sales fell 10% in the recent fiscal fourth quarter and earnings before interest, taxes, depreciation and amortization dropped 24%. Overall, the company's net loss more than doubled to $118.6 million, or $2.11 per share, from $56.9 million, or $1.06 per share a year earlier. Revenue fell 7.4% to $1.28 billion.
Nook revenue for the full fiscal year declined 17% to $776 million.
Declining Nook device sales in the fourth quarter contributed to a 9% drop in digital content sales in the quarter, although those sales were up 16% for the year. The bookseller said it would continue to sell its current color Nook tablets at reduced prices through the holiday period.
Unlike in past quarters, Barnes & Noble didn't address its share of the U.S. e-book market. Last fall, during a presentation to investors, Mr. Lynch said Barnes & Noble controlled approximately 27% of the e-book market. By late February, Mr. Lynch pegged Barnes & Noble's e-book market share at an estimated 25% during a call with analysts.
—Shira Ovide contributed to this article.

Strategic Management
Barnes &Noble, the Last Big Bookseller Standing: But for How Long?
After a disappointing holiday season, Barnes & Noble leadership must decide how to retool its strategy to compete with online behemoth Amazon.com. The bookseller has tried to forge a strong digital arm through its Nook e-readers, but Wharton experts say the chain is caught between the need to bolster its in-store experience, and the drive to keep up in an ever-growing tablet market as readers increasingly turn away from printed books. http://knowledge.wharton.upenn.edu/article/3167.cfm

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An E-Book That Glows in the Dark

By DAVID POGUE

Barnes & Noble's Nook gets Angry Birds

Barnes and Noble's Nook Color device made a clear play to move from e-reader to tablet Monday by adding apps, including the popular game Angry Birds.
Pandora Internet radio, the recipe app Epicurious, the news app Pulse and the game Uno are among 125 apps available in the new Nook Apps store. Our Technology blog explains:

The updates come as the Nook Color is being switched over to a newer version of Google's Android operating system, called Froyo. Unlike the Honeycomb software, which was designed specifically to run on tablets, Froyo was designed for phones but is on many tablets, such as the Samsung Galaxy Tab.
But while the Nook Color can now run Android Froyo, it won't be running all Android apps. Instead, Barnes & Noble is asking developers to optimize their apps for the Nook Color and submit them through the Nook Apps store, rather than simply allowing users to download apps from the Android Market.

In an important move for readers, a new social networking app called Nook Friends will allow Nook users to, our Technology blog writes, "see what their friends are reading, read reviews of books, loan books to each other, share quotes from a book, list their progress in a book and recommend a title to a buddy."
That's the kind of social reading that many publishers and developers have been talking about. The only problem is that it's not platform-agnostic -- in other words, someone using their Nook has these robust sharing capacities only with other Nook users, not all other e-book readers.
However, one ubiquitous social networking tool is part of the new Nook color package. Hitting "like" buttons next to specific titles in the Nook bookstore app will now show up on readers' Facebook pages.
-- Carolyn Kellogg
Image: Angry Birds running on a Nook Color tablet from Barnes & Noble. Credit: Barnes & Noble