Losing Ground on Nook, Barnes & Noble Ceases Its Own Manufacture of Color Versions

Barnes & Noble has conceded that it cannot compete head-to-head with the iPad and the Kindle Fire.

Reporting a big loss at its Nook e-reader division that dragged down the company’s fourth-quarter results, Barnes & Noble said Tuesday that it would no longer make its own color tablets. Instead, it will work with third parties, which will make the devices in exchange for co-branding opportunities.

The announcement is essentially Barnes & Noble’s white flag, signaling that it cannot compete in a market dominated by Apple, Amazon.com and Samsung. It will still make and sell the black-and-white versions of the Nook, which generate the majority of the company’s digital book sales.

The company plans to discount its remaining Nook tablets through the holidays.

Nook-articleInlineBarnes & Noble will still make and sell the black-and-white versions of the Nook.

“Our aim is to sell great tablets connected to our best content catalog and high-quality bookstore services we’ve done, but do so without the sizable upfront risk,” William J. Lynch Jr., Barnes & Noble’s chief executive, said on a call with analysts.

The development raises questions about what lies ahead for the embattled bookseller, which remains under pressure from better-financed digital rivals like Amazon. The company’s loss of $2.11 a share exceeded the average analyst estimate of 99 cents, according to data from Capital IQ. Revenue decreased 7.4 percent, to $1.28 billion, while the net loss was $118.6 million.

Company executives were silent about talks with Leonard S. Riggio, Barnes & Noble’s chairman, who has sought to buy the chain’s 675 stores. Nor did they discuss the state of talks with Microsoft, an investor in the Nook business that had shown interest in buying the division’s digital assets.

Talks about possible transactions were still continuing, according to a person briefed on the matter, though it was unclear if or when a deal would be reached. Barnes & Noble has indicated that it will not part with its core retail stores for anything less than $1 billion.

Though the company’s latest results gave investors heartburn — shares in Barnes & Noble tumbled 17 percent Tuesday, to $15.61 — stopping some of the red ink in the Nook unit may help stabilize the business and make it more attractive to potential suitors.

And the company can still point to its inventory of digital books as its single most valuable asset, which may draw possible buyers.

But the outsourcing of the device manufacturing reflects the difficulties for Barnes & Noble in refashioning itself more in the Apple mold.

Introduced in 2009, the Nook was meant to help usher the company into the Internet media age, allowing it to compete head-to-head with Amazon in both devices and digital books.

The next year, Barnes & Noble took the even riskier step of introducing a color tablet, the Nook Color, that was aimed more at competing with the iPad. The company introduced ever more sophisticated models, including a 9-inch high-definition tablet.

Such was the promise of the Nook that it drew in both Microsoft and the British publisher Pearson, which together bought 23 percent of the business and valued it at about $1.8 billion. And several Nook tablets have won higher praise from reviewers than their Kindle rivals.

That has not translated into sales, and the division meant to revive Barnes & Noble has instead weighed down the rest of the company. In the fiscal fourth quarter, the Nook unit lost $177 million before interest, taxes, depreciation and amortization, or Ebitda, more than doubling the loss from the period a year earlier. Sales fell 34 percent, to $108 million.

The company has also had to grapple with the high costs of manufacturing its own devices. Unsold tablets accounted for a $133 million write-down in the fourth quarter and $222 million for the entire 2013 fiscal year.

Mr. Lynch outlined some of the expenses involved in supporting its tablet business to analysts. Not only was the company responsible for the hardware, it also invested in developing the software and in marketing the devices.

Barnes & Noble’s physical bookstores have not fared much better. Fourth-quarter Ebitda at the company’s retail arm fell 24 percent, to $51 million, while revenue declined 10 percent, to $948 million.

One sign of the company’s troubles: the fourth quarter suffered in comparison to the year-ago period, which reaped huge benefits from sales of “The Hunger Games” and the “Fifty Shades of Grey” trilogies.

Mr. Lynch told analysts that while the company opened two retail stores last year, it closed 18. Barnes & Noble will open five locations this year, but will close 15 to 20 existing ones.

One brighter spot for Barnes & Noble was its college bookstore business, which had $3.8 million in Ebitda for the quarter on $252 million in revenue.

Source: http://dealbook.nytimes.com/