How the Nook Nicked B&N's Q2 Numbers

White-hot consumer demand for the new Nook e-book reader is proving to be a mixed blessing for Barnes & Noble. Sold-out pre-orders for the device were a rare bit of good news in an otherwise gloomy fiscal second-quarter report issued today, but chasing demand for the Nook is forcing the bookseller to hike its investment in manufacturing. Regardless, executives at the book retailer think the e-book game is one that Barnes & Noble can win, thanks to its size and market power.

In the near term, Barnes & Noble, along with other marketers of e-book readers, faces a serious hardware production bottleneck. The Nook, like Amazon’s Kindle, Sony’s Reader and the upcoming device from Plastic Logic, is assembled by Prime View International of Taiwan, which controls the E-Ink technology used in nearly all electronic paper displays.

Increasing production of the Nook, therefore, is not simply a matter of Barnes & Noble sending a bigger purchase order. It must compete for displays and manufacturing capacity with Amazon, Sony and others, all of which are experiencing similar spikes in consumer demand for their e-book readers. Securing a bigger share of those finite resources could mean an increased cost-per-unit for Barnes & Noble.

Company executives on a conference call to discuss the latest results declined to say by how much they’re boosting Nook production but stressed that the increased investment reflects more than just the higher manufacturing costs. “It’s a whole capital investment in the market opportunity,” president William Lynch said. “It’s the content acquisition, it’s the people, it’s the in-store marketing. It’s everything.”

Despite the problems meeting demand, Barnes & Noble executives remain extremely bullish on the e-book and e-book reader category (for a more in-depth look at the company’s prospects in the space, see our GigaOM Pro report, How Barnes & Noble Can Avoid Getting Netflixed, sub. req’d). “This will be a multibillion-dollar business for Barnes & Noble,” CEO Stephen Riggio said. That’s partly due to the many barriers to entry facing new players, he said, among them content acquisition and aggregation costs, rights management, synchronizing products across multiple sales platforms and other challenges. “Digital content is going to be a much-less fragmented business than selling [physical] books,” Riggio said. In essence, when it comes to e-books, size matters.

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