Updated Nook Color shows a smart $249 tablet strategy

Barnes and Noble released a software update for its popular Nook Color eReader on Tuesday that expands magazine offerings and features, while also adding parental controls to the device’s web browser. The company says that version 1.3 of the Nook Color(s bks) software improves Wi-Fi connectivity in addition to bringing other performance improvements. Current Nook Color owners will be prompted by the on-device software update mechanism, but users can download version 1.3 directly to a computer and install it manually, too.

After the software update, Nook Color owners will have access to new periodical titles such as Fortune, People, (s twx) Sports Illustrated, Time, Parents and Fitness, bringing the total number of available magazines to more than 200. The first four new additions include an electronic copy of the print edition, which is available freely to existing print subscribers, as well as enhanced interactive features, including videos and audio podcasts, animations, and additional photo galleries. Barnes and Noble says these new interactive features will be added to all 21 U.S. magazine titles in the Nook Color store by the end of the year.

In a press release, the company expands on the new functionality, saying:

With these embedded multimedia enhancements, magazine lovers will be able to watch celebrity interviews, see the week’s sports highlights, listen to podcasts, take quizzes, get how-to’s on arts and crafts, and even learn new exercises with fitness videos to stay in shape.  These special editions also feature a portrait-centric reading experience that’s fun and simple to use, as well as the ability to get to desired content quicker.  Just tap the article promoted right on the magazine cover or in the table of contents.

This approach of blending traditional reading with web-like interactivity isn’t new for the Nook Color. In fact, the product itself is a blend; it’s the tablet that isn’t a tablet — unless you want it to be. First and foremost, it’s a 7-inch color reading device for content sold by Barnes & Noble. But the company built a custom interface on top of Google’s Android (s goog) platform, which has opened up the possibilities for basic email and web browsing. A curated application store arrived in a later software update, providing a wider range of functionality without overwhelming users or taking away from the device’s core use of reading. And it does all this for much less than most Android tablets at $249.

The reason this works is because unlike many companies, Barnes and Noble isn’t trying to compete against the iPad for its depth of functionality. Instead, the Nook Color smartly offers solid breadth: The device offers basic features that customers want in a portable device, and all of those features work well. In a sense, that’s actually an Apple-style(s aapl) approach. But the Nook Color appeals to more than just mainstream consumers.

Since the device’s underpinnings are Android, it didn’t take long for enthusiasts to exploit Google’s platform with custom software with the results show in this video demonstration.

The process to turn the Nook Color into a full-fledged Android tablet isn’t too challenging, and for those that are too timid to try, companies are selling a plug-and-play solution. No, a customized Nook Color isn’t the most powerful Android tablet on the market, but at half the price, people are buying it. Barnes and Noble sold one million units in the final quarter of 2010 and has taken delivery of three million Nook Color units, according to DigiTimes.

Part of the appeal is surely the price, or more precisely, the perceived value of the tablet at the $249 cost. This same value proposition has driven the stock of HP TouchPad (s hpq) tablets to zero in retail and online outlets. HP’s tablet couldn’t compete with the iPad and others at $400 to $500, and the company decided to liquidate stock for $99 to $149.

At that pricing, several hundred thousand consumers were willing to overlook the possibility of limited future support and third-party applications. Why? Because at $99, the tablet makes for an inexpensive slate that’s quite good at web browsing, email, and e-book reading. Simply put: The value of those activities is worth at least $100 to consumers.

Barnes and Noble has figured this out with its $249 Nook Color. HP figured it out as well with $99 TouchPads, but it can’t afford to sell the tablet at a loss: The bill of materials alone is around the $300 mark. We’ll know within a few months if Amazon(s amzn) has learned from this situation when it launches its expected tablet, and I suspect it has.

It’s becoming more difficult to compete against a $500 iPad and its 18-month head start over others with a similarly priced device. Instead, an inexpensive slate that does a few key features really well, but can be added to over time, may the best bet in the long run. If that doesn’t sound like a good strategy, just look at sales figures for Barnes and Noble’s tablet that’s not a tablet.