(Source: Michael Rafter)
Book seller will look to partner with third parties for branded color tablets, to avoid soaring losses

Between fiscal Q4 2012 and fiscal Q4 2013 (calendar Q1 2013), Barnes & Noble, Inc. (BKS) took a financial beating thanks to soaring losses from its tablet unit.  

The book seller's retailer wing dipped slightly from last year, down to a profit (EBITDA) of $51M USD, versus $67M USD from a year before.  The new college textbook unit chipped in an additonal $4M USD.

I. Licensing, E-Book Slump, Cost-Cutting Drive NOOK HD/HD+ to Massive Losses

But the tablet unit lost $177M USD in Q4 2013 -- $100M USD more than it did last year.  That plunged the otherwise profitable company to a net loss.  Revenue for the tablet unit plunged to $108M USD from $164M USD last year.

E-INK readers have been a double-edged sword for Barnes & Noble.  While, Inc. (AMZN) showed the market that e-books are a ticket to higher profits, B&N's Nook -- launched during the 2009 holiday season -- has been largely a money loser for B&N.  The company added a color Android tablet (the Nook Color) during the holiday 2010 season, which was followed by the Nook HD and Nook HD+ tablets.  

But ultimately if E-INK were break-even or slimly profitable, with e-book sales considered, color tablets were even worse for the book seller, proving to be pure money-losers.  The sector's aggressive pace of cost cutting -- plus forced licensing from Microsoft Corp. (MSFT) -- left Barnes & Noble swallowing a loss for every tablet.

Steve Ballmer
With partners like this, who needs enemies?  Microsoft (CEO Steve Ballmer pictured) has forced Barnes & Noble into painful licensing with lawsuits, despite their common e-book business.
[Image Source: Getty Images]

The parasitic Microsoft relationship is particularly peculiar in that the pair are technically partners -- Microsoft and B&N jointly own stakes in the "Newco" e-book venture.  Microsoft owned approximately 16.8 percent stake in Newco, while B&N owned 83.2 percent ($1.49B USD) of the venture as of its April 2012 launch.  

That partnership hasn't stopped Microsoft from suing its partner over alleged patent infringements (which were eventually settled with a licensing deal).  As B&N uses Google Inc.'s (GOOG), it's as much a competitor to Microsoft as a partner (Microsoft's allies use Windows 8 or Windows RT in their tablets).  Microsoft was rumored to be eyeing a $1B USD acquisition of the entire NOOK business, but it appears that ultimately B&N has opted for a different route.

This may be a case where the licensing parasite drained a little too much, killing the host.  At the very least, the cost of lawsuits and licensing didn't help B&N.

The company's losses were further exacerbated by the fact that Q4 was a down quarter for e-book sales, with no major hits, versus a year ago which saw the release of books in the Hunger Games and Fifty Shades of Grey trilogies.  Plus Apple, Inc. (AAPL) allegedly drove up prices via anticompetitive price fixing tactics with book publishers, which raised the average cost of an e-book from $10 to $15, while giving the digital seller virtually no cut of the extra cost (while offering lower overall sales due to supply and demand).

II. Fire Sale Ahead

So what is B&N going to do to avoid allowing these losses to scuttle the entire company?  Given the severity, the company has at last sprung into action with a decisive plan of action -- one which preserves the NOOK brand in some form.

The good news for consumers is that it sounds like you should be able to potentially get the decently reviewed NOOK HD or NOOK HD+ (powered by  Android OS) at fire sale prices shortly -- or as the company puts it:

The company will continue to offer its existing inventory of its high quality NOOK® HD and NOOK® HD+ devices at amazing prices through the holiday.
The Nook HD+ series is already available at incredibly low prices. In early May, B&N was selling the 16GB and 32GB Nook HD+ models for $179 and $199 respectively. Today, the company is selling those same tablets for $149 and $179 respectively. That $149 entry price gets you a 9" 1920x1280 display, 1.5GHz dual-core processor, microSD slot, Wi-Fi, Bluetooth, and full support for the Google Play Store.

Looking ahead Barnes & Noble is planning a major shift to cut its losses.  It will no longer design and build its own color Android tablets.  Instead, it will rely on branded contract designs with third party OEMs.

The Nook HD and HD+ will see inventory liquidation this fall. [Image Source: B&N]

It writes:

The widely popular lines of Simple Touch™ and Glowlight™ products will continue to be developed in house, and the company’s tablet line will be co-branded with yet to be announced third party manufacturers of consumer electronics products. At the same time, the company intends to continue to build its digital catalog, adding thousands of eBooks every week, and launching new NOOK Apps™.

Ultimately this is good news for Barnes & Noble, but somewhat bad news from consumers in the long term, as the tablet market looses another viable competitor. 

It's hard to say who's to blame for B&N's decision to bow out of this market.  One could easily blame Microsoft for its allegedly high licensing fees (which are reportedly $10 USD or more per device).  One could blame B&N for poor marketing.  One could blame Amazon cost cutting -- or blame Apple and Samsung Electronics Comp., Ltd. (KSC:005930) for prompting those cuts by driving Amazon into third place.  Or one could even blame Apple's (alleged) e-book price fixing for raising the cost of e-books, cutting sales while offering no additional margin per book sold.

Of course, one could simply blame the market itself -- which is highly competitive and has high development costs with low rewards for smaller players.

Source: Barnes & Noble on BusinessWire

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