21 Comments

Summary:

Microsoft invested $300 million in Barnes & Noble’s Nook business. As the following chart shows, that probably wasn’t a great idea: Production problems, slowing ebook sales and other factors are contributing to the Nook’s troubles.

In Tuesday’s earnings report, Barnes & Noble broke out Nook sales for each quarter back to April 2011. Here they are:

*Nook revenue is comprised of Nook devices, digital content and accessories.

A holiday sales spike following the launch of the Nook Tablet in November 2011 hasn’t been enough to sustain the Nook business. And despite the launch of the front-lit Nook e-reader in April 2012, Nook business revenues are flat compared to this time last year.**

Microsoft is investing $300 million to spin off Barnes & Noble’s Nook and college businesses into a new company. But these revenue figures suggest that’s a bad bet. (Note: Amazon doesn’t release Kindle revenue figures at all. Its ebook market share is higher than Nook’s, but we don’t know how Kindle revenues compare, though here’s our best guess. B&N’s relative openness makes it easier to write a post like this about the Nook business. Amazon offers a lot less to go on.)

E-reader problems

Barnes & Noble has had particular trouble with e-ink devices. The Nook Simple Touch e-reader (without GlowLight) had such poor holiday sales that B&N downgraded its full-year guidance. And in Tuesday’s earnings report, Barnes & Noble said that “production scaling issues” prevented it from filling orders for the Nook Simple Touch with GlowLight. That was a “missed opportunity,” CEO William Lynch acknowledged in an investor call following the report.

Nook with GlowLight may have great reviews from Consumer Reports and tech blogs and B&N may have beat Amazon (AMZN) in the launch of a front-lit e-reader. But that doesn’t matter if people can’t actually get their hands on one. Amazon is widely expected to release its front-lit Kindle this fall, and it appears B&N has already squandered its first-mover advantage.

Falling prices

Barnes & Noble also attributes falling Nook device revenues to price cuts. But the company is going to have to keep dropping prices on its e-readers and tablets to stay in line with Kindle and with budget tablets like Google’s Nexus 7 and the anticipated iPad Mini. It can’t increase prices to increase revenues.

International delays

Barnes & Noble and Microsoft are hoping to find salvation overseas. The Nook will launch in the U.K. this fall — first through an online storefront, nook.co.uk, though B&N promises that well-known retail partners will be announced soon. And Microsoft will spend $25 million a year for five years on international launches. But Kindle has already been in the U.K. for two years and recently partnered with British bookstore chain Waterstone’s to sell Kindles in its stores. Rakuten’s Kobo is already in the U.K., too, and both companies are expanding rapidly to other countries. Microsoft’s $25 million payments could help B&N catch up, but it is already far behind.

Slowing ebook sales

In Tuesday’s earnings call, B&N’s Lynch said apps and digital newsstand sales growth is “a little higher” than ebook growth. Lynch noted that book publishers are also seeing slower ebook sales (and here are Publishers Lunch’s recent findings on that). Nook’s ebook market share is still between 25 and 30 percent, the same as it was a year ago. It’s nice if apps and newsstand can drive some sales. But Barnes & Noble is going to have an even tougher time competing on those products than it does on ebooks. Apple and Android have the app market cornered, and digital magazines make up just a tiny sliver of overall magazine sales.

Resources

Barnes & Noble Q1 2013 earnings report (our post here)

Earnings call transcript

An earlier version of this article stated that Barnes & Noble’s app and digital newsstand *sales* are higher than ebook sales. That is incorrect and I apologize for the error. Lynch was referring to the growth rate, not overall sales numbers.

** Or they’re down: The Digital Reader points out that Barnes & Noble previously reported Nook sales of $277 million for the period ending July 30, 2011, but now says they were $191.4 million. A Barnes & Noble spokesperson said the discrepancy is due to accounting for agency pricing and the $191.4 million reflects the actual selling price of ebooks.

You’re subscribed! If you like, you can update your settings

  1. Nice summary, Laura. I’m stunned that apps and digital newsstand sales are higher than ebook sales for B&N. I’ll bet that’s not the case for Amazon. I also think there’s a larger trend that B&N’s results are a symptom of and I summarized it here: http://oreil.ly/NEFAVR

    1. Great post, Joe. I’m so curious to see how e-ink readers play out. I still think there is a place for them — especially front-lit! — but I may be wrong.

  2. Marcello Vena Tuesday, August 21, 2012

    Thanks Laura for the nice summary.

    The difference between the $277mln and $191.4 is also clear in th 8k format B&N delivered to SEC. There are $90mln of intercomapny Sales of NOOK business to the retailer and college business. So basically in 2011 they were double counting the Sales of device and Content.

    Interesting to notice the intercompany NOOK sales decreased -13% this year. it really means they sold a lot less Devices thought theire retail and college stores.

    Two important facts are to be highlighted:
    The 140% sales growth of 1Q12 vs 1Q11 has brutally stopped as 1Q13 is the same as 1Q12.

    More importantly the ebook market share must have dropped considerably from the claimed 25-30%.
    it doesn’t seem that it can realistically be higher than 15-18% (perhaps less)
    We know US ebook business was – consumer prices – around $3.0 bn in 2011 (Bookstat, AAP, http://www.thebookseller.com/news/e-books-30-us-adult-fiction-trade-sales.html).
    Let irrealistically assume that in 2012 the ebook market won’t grow at all and stay at same level of 2011. It means $3 bn or $750 mln every quarter in 2012.
    Let’s also assume that the quarter April-July is the worst of the year -33% than average. it still makes a whopping $500 mln. 25% of this would be $100 mln.

    Now if you says that App and digital newstand sales were higher that ebook… They must at least be highter than $100 mln.

    So adding up all digital content we should see a minimum of over $200 mln plus all the device sales which we have not considered yet.

    However, according to today’s press release, the total NOOK business including devices is however even less than $200 mln. (only $192 mln).

    So it means that their ebook business must be way lower than $100 mln and therefore their market share way below the 25% of a market, we have assumed, that didn’t grow (!!). If we were to model the market growth in 2012 we would get an even lower market share.

    It’s hard to guessestimate their real market share but it’s even harder to believe it is around 25%. Numbers don’t add up.

    Cheers

    Marcello Vena
    @marcellovena

    1. Thanks, Marcello. This is an interesting way to get at the issue. One thing: BookStats pegs U.S. ebook revenue in 2011 at $2 billion, not $3 billion (http://paidcontent.org/2012/07/18/ebooks-are-now-the-most-popular-format-for-adult-fiction/)

      1. Actually it’s 3.0 billion. The 2.1 billion refers to net revenue by Publisher. If you add the 30% commission for the retailers the Consumer dollars are more or less 3.0 billions, of which 2.1 bn are the net revenue reported by Bookstat.

    2. Marcello-

      Couple of problems with your analysis.

      1. GAAP rules require Barnes and Noble to report ebook revenues on a “net” rather than gross basis. IE, only the retailers “cut” counts as revenue. This is the difference between the two reported numbers, they have explained it many times. On the GAAP basis the overall ebook market is a third as large in terms of consumer prices, so 166 million for the quarter by your numbers.

      2. Barnes and Noble stated that the GROWTH in app and newstand revenues was higher than the GROWTH in ebook sales. They didn’t say those units had outgrown ebooks on an absolute basis. On an absolute basis those units (which are also reported on a “net” basis) are probably still much smaller. I recall hearing $15 million (reported on a gross basis) for these units last year, so I would estimate about $10 million revenue (reported on a net basis) this year.

      So to attain the market share they claim, Barnes and Noble would only need about 42 million in quarterly ebook sales. Added to the $10 million from apps and papers that would leave about $140 million for device sales. Since sales at Barnes and Nobles stores were $90 million(the “elimination”) numbers, that means they had $50 million sales at other retailers.

      That seems believable. The numbers add up.

      Also, they never double counted the “elimination” revenue. The “elimination” is only needed when they report both retail revenues and nook revenues together and sum the two.

      1. Hi Peter,
        thank you very much for bringing additional evidence to what we had sorted out.
        In the second part of the analysis (http://paidcontent.org/2012/08/21/why-the-nook-is-failing-one-chart-four-reasons/#comment-131993) we had already worked out what you suggest here.

        As a consequence, Laura went back and asked to B&N as it was indeed growth (as it turned out later) or sales what they meant when referring to app and newsstand business. The analysis was helpful to infer that since numbers were not adding up, some of the underlying assumptions had to be corrected.

        Incidentally, if you were right on the observation that the difference between the $277mln and $191mln in 1Q FY12 is only due to different accounting rules [Non GAAP (full sales) vs GAAP (net sales)], one could guess an approx. estimate of what 1Q FY12 net sales were and also what 1Q FY13 sales are.

        If you were right, I am not sure, then the $86mln difference ($277mnl-191mln) would more or less be the 70% of sales that goes to big publishers… therefore gross sales (1QFY12) would be $123mln (=$86mln/0.7) and net sales close to $37mln (=$123mln*0.3).

        Since ebook sales seem to have grown less than app and newsstand this 1Q FY13, they should have grown less than the average 46%.

        Therefore current ebook net sales (1Q FY2013) should be in the range $37mln (assuming 0% growth) – $54mln (assuming +46% growth). The $42mln net sales for 1Q FY13, you suggest is incidentally is this range…

  3. Great analysis. I think particular troubling for B&N’s digital future is their delay in marketing the Nook device/ecosystem to Europe. My tiny publishing firm has, over the past six months or so, seen significant growth of digital unit sales in Europe for the Kindle ecosystem – growth that seems to be escalating at a good pace month over month. I imagine other publishers are seeing the same thing. B&N has not, as yet, even tried to get a foot-hold in on the Continent, although of course they announced for Britain just recently. Too little too late, I’m afraid.

  4. Aditallup with the event of no-dales outside the US and you have one more reason of this mess. Amazon haven’t trouble selling abroad; why B&N don’t sell their books abroad?

  5. I can see why e-book sales are down. I think people are finding out that e-reading isn’t all it’s cracked up to be. I have a Nook Simple Touch and the Nook and Kindle apps for my PC. However, I find it hard to pay $8+ for books I don’t truly own and can’t share once I’ve finished. Same with magazines, though I can see why newsstand sales are higher—people are used to reading a magazine/newspaper once and tossing it. Books are different.

    I read Mr. Wikert’s posting. His question is whether eReaders can compete in the device world. I don’t think they really can. People are looking to get the most for they’re money. An entertainment device for e-reading will fail against an entertainment device that can do other productive things as well as provide e-reading.

    I’m only hoping that these trends aren’t signals of a much bigger problem—people not reading.

  6. Laura Hazard Owen Tuesday, August 21, 2012

    I want to alert you guys to the clarification I added above in the last paragraph: Reading back over the transcript from the earnings call (http://seekingalpha.com/article/820401-barnes-amp-noble-ceo-discusses-f1q13-results-earnings-call-transcript?page=5&p=qanda&l=last), it’s unclear if Lynch is saying app sales and digital newsstand sales are higher than ebook sales, or if the *growth* of those areas is faster than ebook growth (with ebooks still selling more overall). Also, revenues vs. units is unclear. I have asked Barnes & Noble.

    1. If it’s growth what it is meant in the transcript and if they are accounting (for the top publishers) their commission rather than the consumer sales, then revenue numbers might look more compatible with the said estimate of market share of 25-30% (at least on large trade publishers). Thanks to Michael Cader – Publisher Lunch – for confirming this interpretation.

      1. B&N has confirmed it’s GROWTH, not sales. That is clarified above.

  7. However they got to this point of “fail” – the MSFT investment all but assures this one goes all Zune, if you will…

  8. While it’s an interesting analysis, it all but ignores the fact that MIcrosoft’s investment was also in B&N’s college business, not just the Nook business. You can’t draw a conclusion on the wisdom of an investment unless you look at everything in which it was invested.

    Even though the college business may not be going gangbusters (that’s hard to tell without numbers), judging an investment as potentially bad requires reflecting everything the investment was actually in.

  9. JeffRutherford Thursday, August 23, 2012

    If app growth is higher than books, it seems there’s an argument that cost-concious consumers are buying Nook Tablets as a cheaper alternative to Apple’s iPad. Interesting.

    I’ve long wondered too if BN and Apple have already captured the most devout readers who are likely to switch to an eReader. I suspected that many Nook holiday purchases last year were impulse purchases – not made by consumers that I would characterize as heavy readers. 6-8 months down the road (if not sooner) are those consumers going to be regularly downloading and reading eBooks? I suspect not.

  10. JeffRutherford Thursday, August 23, 2012

    Correction – I meant to write “BN and Amazon have already captured . . .”

Comments have been disabled for this post