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Summary:

In a *CNBC* interview today, Barnes & Noble (NYSE: BKS) CEO William Lynch told David Faber, “Whatever we do, we will continue to have a tigh…

William Lynch
photo: CNBC

In a *CNBC* interview today, Barnes & Noble (NYSE: BKS) CEO William Lynch told David Faber, “Whatever we do, we will continue to have a tight relationship between the Nook and [our] stores.” The interview follows yesterday’s news that Barnes & Noble may split off the Nook business from the rest of the company.

Lynch went on to say, in an awesome sentence, “We know that one of the goose that have laid the golden egg here in our success with Nook has been the showrooms that the stores provide, and we’ll continue to have a very symbiotic relationship there. We get that.”

In the interview, Lynch hoped to quell investor and analyst concerns that Barnes & Noble is worthless without a digital component, and that the company does not have enough capital to sustain its digital business. He stressed the Nook business is “undervalued” and said, “We have enough capital to execute our business strategies….There are whole industries looking for businesses of this kind, growing at this trate, with these kinds of variable margins, and so we feel good about it.”

Here’s the video (also here at CNBC’s site). My transcript of the good parts of it, which is way better than CNBC’s weird computer transcript, is below. A screenshot from the segment, below, shows Barnes & Noble’s e-reader market share at 13 percent–about half of the 27 percent Barnes & Noble said it was as recently as November. “Estimates” is cited as the source and it is unclear if these are directly from B&N; I’ve asked the company and will update the post when I hear back.

William Lynch: “The growth is going to be in digital, hence our investments in digital and how we’ve scaled that business. But the physical book business, by any measure and any projection, will continue to be the largest part of the business, and we’ve been growing share there, and in fact growing the business in absolute terms…That is a very profitable side of the business.”

David Faber [sounding incredulous]: “And you expect that to continue? You would expect to see continued increases in physical sales of books, let’s say next year over this year?”

Lynch: “No, we’ve built into our models, clearly, a decline in physical–“

Faber [interrupts]: “So what happened this year? Why were people suddenly buying more books than they had over the last few years?”

Lynch: “Well, we gained a lot of share, there are fewer places to buy books in this country…”

Faber cites a concern from a Barclays analyst that “‘absent a launch period, demand for Nook products appears to be decelerating faster than original management forecasts.’ Is that true?”

Lynch: “Our Nook device business grew 70 percent year-on-year. I challenge anybody to find a company selling mobile devices, many companies selling mobile devices, that had that kind of growth…I read in the Wall Street Journal (NSDQ: NWS) a publisher cited that apparently we had the fastest growth in e-books this Christmas.”

Faber: “I saw that as well, but sales of the Nook Simple Touch did seem to miss expectations, correct?”

Lynch: “It did, yeah. So–we mis-forecast–Nook–uh, Nook Tablet exceeded expectations, and on Nook Simple Touch, last year we ran out of our black and white e-reading product, which is what the Nook Simple Touch is [note: The Nook e-reader available for Christmas 2010 was the first-generation e-reader, not the Simple Touch], in mid-December, and as we looked at that data point, we over-anticipated the growth this year, and that was a forecasting mistake, but overall we were very pleased with the growth of the portfolio.”

Faber: “How long you going to take to decide what to do with the Nook business?”

Lynch: “As long as it takes–“

Faber: “It introduces some uncertainty within a company, typically you would want, I would assume, to make the decision as fast as possible.”

Lynch: “Speed isn’t a factor here. We may do nothing. We called it an exploratory, and if you look at that business in 2 years, it’s grown to $1.5 billion, amazingly valuable space…We’ve established the #2 brand, we grew share faster than anybody in e-books last year. Apparently, according to that publisher, we continue to do that, uh, last week coming off a holiday, so it just made sense to explore our options there. We think it’s undervalued, clearly it’s being undervalued.”

Faber asks if Barnes & Noble needs another investor to help it grow the business. “What about a Google?”

Lynch: “I’m not going to comment–we have enough capital to execute our business strategies. Now, the tolerance for the investment in this business, clearly, some investors have different tolerance than others. I will tell you, uh, to the extent, um, there are whole industries looking for businesses of this kind, growing at this rate, with these kind of variable margins, and so we feel good about it. Our lifetime value calculations on the customer warrant the kind of investments we’re making. We have a billion-dollar credit facility and plenty of room under that facility. We’ve been growing share faster than anyone, we can compete, um, there are different strategies that we could pursue to help us compete even better, and we’re looking at a whole host of them.”

Faber: “So you can take on Amazon (NSDQ: AMZN) and Apple (NSDQ: AAPL) and their incredibly deep pockets?”

Lynch: “I don’t think we’re competing with Apple, the iPad on Apple.” [Throughout the conversation, Faber does not distinguish between e-ink readers and tablets.]

Faber: “Well, I mean the iPad and the Kindle and the obvious ability on both of those devices to buy books as well, not from Barnes & Noble.”

Lynch: “Well, certainly we view Amazon as a competitor, and two years ago when we launched our digital bookstore and launched the Nook, everyone told us they’re a formidable competitor. That is absolutely true, and in that time we’ve been very successful. We believe, certainly, that there will be more than one digital and media book retailer in this country. There’s too many people aligned to ensure that happens–publishers, third-party retailers, and we’ve been competing very well, so yes, we absolutely believe we can compete, and continue to succeed.”

Faber: “And final question, I mean in terms of the Nook itself, if you were to separate it, aren’t you ultimately taking business away from the sale of books, and it seems to be so wound into the phyiscal stores, and the delivery of the device in some ways at the stores, that it would seem hard to separate the two.”

Lynch: “Yeah, that’s a good point, David. Whatever we do, we will continue to have a tight relationship between the Nook and those stores and the Nook will continue to be Barnes & Noble’s e-reader. In terms of separating the two, there are a lot of different options and ways we can do that. We know that one of the goose that have laid the golden egg here in our success with Nook has been the showrooms that the stores provide, and we’ll continue to have a very symbiotic relationship there. We get that.”

Faber: “OK, and I’m going to still be able to bring my grandkids to a bookstore?”

Lynch: “Absolutely. Barnes & Noble, for sure.”

  1. Got Faber ‘s point-that’s pure business, at the end of the day you’ve to face the giants and figure out a way to win.

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  2. My kid got one of these nook books. The bad thing is it had a creaked screen.. I called the nook hot line and was told seeing my X had bought it from office max. That I would have to deal with them… That’s fine only that my x had the receipt that i was unable to take care of it as fast as the store would have liked.. So now I have talked to nook and Office max and no one wants to help me get this resolved. So just remember at the end of the day no one wants to do anything about this.. I would think that the CEO of the book store making the nook would want to stand behind there product..Unfortunately No one wants to help me… I would love to talk to the CEO of this company to see how they  feel about this….. So feel free to email me…….. At bayouink5@aol.com

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