With Barnes & Noble winding manufacturing on its Nook tablet and content sales dropping, the retailer?s digital business appears to be in hot water.

Barnes & Noble said this week that it will shut down its manufacturing operations for Nook devices and instead partner with a manufacturer to offer co-branded devices going forward. The company insists it is not out of the tablet game completely, but has been resorting to increasingly bigger price reductions to move its tablets.

?To summarize, we are 100 percent not exiting the device business, but we are materially adjusting our approach in the competitive and capital-intensive tablet market,? said William J. Lynch, CEO and president of Barnes & Noble, New York, during a conference call with analysts to discuss the company?s fiscal fourth quarter and year end financial results.

?Overall, the underpinning of our new digital strategy remains the same today as it has since we first entered the digital market, which is to offer customers any digital book, magazine or newspaper on any device,? he said.

Finding a savior
The Nook tablet is a generally well-reviewed device. However, Barnes & Noble has had a tough time competing against Apple and Amazon, which both offer a broader array of content for their devices.

Barnes & Noble was able to enlist the assistance of Microsoft, which owns a stake in the Nook business, as it sought to boost its role in the tablet market.

Barnes & Noble and Microsoft initially announced plans to team up a year ago, with the latter making a $300 million investment in the new Nook Media subsidiary and gaining a 17.6 percent equity stage. Nook Media officially split off from Barnes & Noble in October.

However, Nook sales started nose diving during the latter part of last year, with Barnes & Noble reporting that the Nook business incurred a much bigger loss than previously expected, totaling $475 million in fiscal year 2013.

The Nook segment, which consists of the company's digital business, including devices, digital content and accessories saw revenues drop in the fiscal fourth quarter due to poor sales of Nook devices. Revenues lost 34 percent during this period and 16.8 percent for the year for a total of $108 million and $776 million, respectively.

Slashing prices
To help drive sales of devices, Barnes & Noble recently reduced the price on the Nook HD tablet from $199 to $129 and reports that the response has been good, with sales in May and June so far ahead of expectations.

The retailer plans to offer existing inventory of its HD and HD+ tablets at competitive prices through the upcoming holiday season as it transitions to the new partner model for tablets.

However, the margins on the devices are already slim so such price cuts are costly to the retailer. Amazon and Apple are able to compensate for slim hardware margins through content sales, but if Barnes & Noble?s content sales are starting to slip, too, then there is not much of a reason for the retailer to stay committed to the business.

Digital content sales also dropped during the fourth quarter ? down 8.9 percent ? in part because of the slowdown in device sales. Digital content sales also suffered in comparison to the year ago period when The Hunger Games and Fifty Shades of Grey trilogies drove significant volume.

However, digital content sales were up for the year by 16.2 percent.

Reducing risk
To reduce Nook losses, Barnes & Noble will no longer independently build its own tablets. Instead, it will look to partner on future tablet programs with partners to design co-branded tablets featuring Nook content.

The retailer?s Simple Touch and Glowlight ereaders products will continue to be developed in-house.

Barnes & Noble?s consolidated revenues dropped 7.4 percent for a total of $1.3 billion during its fiscal fourth quarter. It also reported a net loss of $118.6 million compared with a net loss of $56.9 million during the same period a year ago.

For the fiscal year, revenues dipped 4.1 percent for a total of $6.8 billion while the net loss totaled $154.8 million compared with $65.6 million.

?Leveraging a scale manufacturing partner in tablets offloads risks associated with building the products ourselves and will allow us to keep pace with innovations in the rapidly changing tablet market,? Mr. Lynch said. ?Our aim is to sell great tablets connected to our vast content catalog and high-quality bookstore service as we've done, but do so without the sizable upfront risk.?

Final Take
Chantal Tode is associate editor on Mobile Marketer, New York