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Is Barnes & Noble repeating Netflix?s mistake?

Barnes & Noble wants to spin off its Nook ereader and tablet business as a separate company but the move could be a replay of Netflix?s failed attempt last year to separate its traditional media and digital businesses, something consumers were not ready to accept.

Barnes & Noble reported record holiday sales for its Nook business, including devices and digital content while sales on the non-digital side increased only moderately. In order to capitalize on the rapid growth of the Nook digital business, the company said it will explore spinning off the Nook business as a separate company.

?In some ways, this sounds like what Netflix did when it tried to separate physical DVDs from streaming content,? said Noah Elkin, principal analyst at eMarketer, New York. ?The two are related and we saw how well that did for Netflix.

?There is a similar dynamic in the ereader space,? he said. ?We haven?t reached a point where consumers exclusively want digital or print books.

?Separating the two might provide some benefits in terms of making the ereader side of it more nimble but I don?t know if it benefits Barnes & Noble?s business overall.?

Unlocking value
Last fall, Netflix announced plans to spin off its DVD business as a standalone business with a new name so it could focus on its quickly growing digital streaming business. The company quickly abandoned the strategy after unhappy consumers reacted by canceling their Netflix subscriptions.

Barnes & Noble is facing a similar situation, with its digital business growing at a much faster pace than traditional media sales for, in this case, books.

Nook unit sales increased 70 percent during the nine-week holiday period ending Dec. 31, 2011, Barnes & Noble reported.

Digital content sales also put in a strong performance for Barnes & Noble, growing 113 percent during the holiday period. This includes digital books, digital newsstand and applications.

The Kindle Fire from Amazon also did well over the holidays, pointing to how quickly consumers are embracing tablets and suggesting more growth to come.

Mobile advertising network Jumptap recently reported that network traffic to Kindle Fire device jumped 270 percent in the last week of November.

In comparison, Barnes & Noble?s traditional sales are much lower with bricks-and-mortar retailer reporting that store sales increased just 2.5 percent during the holidays and the sale of non-digital merchandise increased just 4.5 percent.

Barnes & Noble has invested heavily in building the Nook platform, hiring the necessary talent and putting significant marketing muscle behind it. With sales growing, the company hopes to further unlock the value it has created in Nook by spinning off the business.

In addition to exploring separating the Nook business, Barnes & Noble is also in discussions to expand the business internationally.

Creating a separate business for Nook may be in response to shareholders who do not see themselves in the digital business. However, Barnes & Noble may not be taking into consideration the value provided to Nook from its connection to the brand.

?Nook has grown rapidly, but continued growth and international expansion will take sustained investment that B&N shareholders may not have the patience for,? said Sarah Rotman Epps, senior analyst at Forrester Research, Cambridge, MA.

?However, the Nook business has benefitted from synergy with Barnes & Noble in two key areas: Barnes & Noble's retail stores and Barnes & Noble's publisher relationships,? she said. ?It's not clear how a separate Nook business would function without the benefit of Barnes & Noble's retail stores and publisher relationships.?

Digital chops
If Barnes & Noble does spin off the Nook business, it will have to beef up its digital chops significantly.
Companies such as Hewlett Packard and Research In Motion have tried to introduce general-use tablets with little or no success in part because of the strong hold that Apple?s iPad has on the marketplace.

The Nook devices and the Kindle Fire have done well because they are lower-priced and are positioned specifically around media consumption.

?By disconnecting Nook from Barnes & Noble, it has the potential to get lost in a sea of other tablets and it potentially loses its identity,? eMarketer?s Mr. Elkin said.

?Barnes & Noble has to make Nook much more compelling as a tablet, which is a harder proposition,? he said.

?In some ways, the success of the Nook and the Kindle Fire is because they are very good at doing very specific things. If you try to give them a wider appeal that is where you run into some challenges.?

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