By Chantal Tode
February 19, 2013
While Amazon’s Kindle business continues to heat up, it looks like Barnes & Noble’s Nook strategy may be fizzling out.
Both companies have focused heavily on building their digital content sales over the past few years, making manufacturing and selling ereaders and tablets a key focus of the strategy. Even though the Nook came out strong, more recently sales have slowed while the Kindle and Kindle Fire continue to grow.
“The Nook business is struggling because there is a growing amount of competition in this space from formidable players such as Amazon, Apple and Samsung,” said Paul Verna, a senior analyst at eMarketer, New York.
“Some of Barnes & Noble's competitors in this space have been in the tablet and content businesses for longer than Barnes & Noble and have established strengths in these areas,” he said. “In Amazon’s case, that includes ecommerce and other forms of digital content besides ebooks, notably movies and music.
“Apple is in a similar position, with a portfolio of content and devices that gives the company leverage over Barnes & Noble.”
Digital content consumption
As consumers increasingly consume eschew print books and publications for digital content consumed via ereaders and tablets, Barnes & Noble has been investing heavily in its Nook business. Early on, results were promising, but last month Barnes & Noble said that its Nook unit revenue fell 12.6 percent during the holiday period.
Then last week, Barnes & Noble warned that it expects to report a bigger loss for its Nook business in fiscal year 2013 than the $262 million loss reported for its 2012 fiscal year.
Additionally, the company said that Nook-related revenues will be less than $3 billion. Barnes & Noble’s shares fell following the bookstore chain’s announcement of lower expectations.
Barnes & Noble is under pressure to build a thriving digital business as its traditional bricks-and-mortar retail business continues to contract.
The bookstore chain recently said that over the next ten years, it plans to reduce the number of bricks-and-mortar stores it operates from 689 down to between 450 and 500 as ebooks and digital publications continue to gain with consumers.
Distribution an issue
However, the Nook faces tough competition, mainly from the Amazon’s Kindle and Kindle Fire, and to a lesser degree, from Apple’s iPad Mini and Google’s Nexus tablet.
Amazon recently reported that ebooks are a multi-billion dollar category for the company and growing fast, up approximately 70 percent last year. In contrast, the online retailer’s physical book sales experienced the lowest December growth rate in 17 years, up just 5 percent.
The Kindle Fire also takes the No. 1 spot for Android tablets, accounting for 37 percent of all Android tablets, the vast majority being United States-based, according to recent research from Localytics.
Barnes & Noble faces several challenges as a hardware manufacturer besides stiff competition, including distribution and its heritage as a bookseller.
“Even though the Nook compares well with many of its competitors’ tablets, the Barnes & Noble’s distribution channel and marketing of its products is nowhere near like those of big players like Apple, Google or Amazon,” said Boris Metodiev, a senior analyst at Yankee Group, Boston.
“One problem for Barnes & Noble is that most people think of the company only as a book retailer – having good ereaders seems reasonable, manufacturing good tablets seems a bit of a stretch,” he said. “And the ereader market will continue to be suffocated by the plethora of seven-inch cheap tablets.”
Another issue for the Nook is the lack of an iBooks reader or a Kindle app for the device, meaning Nook users are more limited in the content they can access.
The iPad mini has both an Nook app and the Amazon Reader/Kindle app.
“So, as you invest in digital assets, are you going to spend your money on an asset that only works on all the devices you may buy?,” said Scott Michaels, a partner at Atimi Software, Vancouver, Canada. “Of course you are.
“The lack of an iBooks reader or a Kindle app for the Nook means your Nook is simply not going to be able to have all of your books, only those purchased via the Nook and its supported other formats,” he said.
“Amazon wants you to buy a Kindle of any version, but they really want to ensure you buy the book from them and stay in the Amazon ecosystem. Hence why they support the Apple platform.”
Another issue for the Nook is that it runs on Android’s Gingerbread OS or version 2.3, which makes is outdated compared to other popular Android tablets, with the Kindle Fire HD running Ice Cream Sandwich or version 4.0 and Google’s Nexus 7 running Jelly Bean or version.
While Amazon's Kindle Fire is the biggest competitor for the Nook and targets much of the same consumer base, the space is attracting other competitors as well, such as Google’s Nexus 7.
“Google's Nexus 7 – another seven-inch cheap tablet with great specs and performance, heavily subsidized by a company that doesn't care about making money from the hardware,” Mr. Metodiev said.
“One great advantage for the Nexus 7 – and any other Google tablet – is that the integration between the hardware and the Android OS will always be the best, since they are both built by the same company,” he said.
Another competitor is the Apple's iPad Mini, which could attract users looking for something slicker and are Apple enthusiasts, even though it is more expensive.
There are also many smaller players looking to gain market share. The most notable is Asus, which built Google's Nexus 7.
However, in the short-term, the competitor to beat is still Amazon with the Kindle.
“From the start, Amazon had three things going for it with the Kindle: the device was inherently compelling, it was innovative, and it was integrated with a deep content portal,” eMarketer’s Mr. Verna.
“Amazon has continued to build on the strength of the Kindle by expanding into tablets and tying it together with other content and services, such as Prime membership,” he said.
Chantal Tode is associate editor on Mobile Marketer, New York