Microsoft's $300 million Nook investment already looks like a clunker

Microsoft's $300 million Nook investment already looks like a clunker

Summary: Barnes & Noble's third quarter was a debacle largely due to disappointing Nook sales. Fortunately, the Nook unit has Microsoft cash to back it up as it rethinks its strategy.

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Microsoft's $300 million investment in Nook Media LLC, a subsidiary of Barnes & Noble, is already looking like a clunker only after a quarter.

Barnes & Noble's third quarter earnings were disappointing and a big reason was the retailer's investment in the Nook. Simply put, Nook devices didn't sell, failed to generate foot traffic in the stores and now are being rethought completely.

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In other words, the Nook strategy needs a complete do-over. That chore is necessary considering Nook sales fell 25.9 percent from a year ago and EBITDA fell 129.9 percent. Barnes & Noble CEO William Lynch said on an earnings conference call:

Despite generating very strong reviews and the highest pre order volume we received on any Nook launch to date sales of those products didn't materialize at the rate we expected through holiday, as heavy competition in the Tablet market negatively impacted our sell-through. In many ways we helped create the portable Tablet category by launching the first ever seven inch media Tablet with Nook color almost three years ago. Since that time, several large technology brands have entered the Tablet market making it more difficult to breakthrough with our award winning products.

We are actively in discussions to leverage our valuable technology and content platform to sell digital content through partnerships. Similar to the partnership we struck with Microsoft on Windows 8. Partnerships are one of the key strategies for growth for our Nook digital content business and we are encouraged by the status and breadth of discussions we're in the midst of. Even with the decline in Nook unit sales in Q3, we grew digital content sales 7% so we've demonstrated we can grow our content business without having to grow hardware sales. At the same time I want to be clear about the fact that we continue to remain committed to the E-reader and Tablet business going forward.

Boy what a difference a few months makes. In October, Microsoft and Barnes & Noble finalized a $300 million investment in the company. The rough plan: Microsoft would help fund Nook's growth in return for a 16.8 percent stake.

Under the Microsoft agreement, Barnes & Noble executives said that the Nook unit gets $85 million a year mostly for international expansion. Analysts were very hung up on the Microsoft cash. Why? They are projecting cash flow and trying to figure out how much Microsoft's dough is keeping the Nook dream alive.

The Nook unit and Microsoft also have a deal on Windows 8 that allows them to split revenue. It's a bit unclear how the revenue split works based on executive comments, but neither the Nook devices nor Windows 8 are spurring widespread buying enthusiasm.

Barnes & Noble CFO Michael Huseby said:

The money that Microsoft invested is being used to help us funnel international expansion and also drive the overall Nook Media business which includes the sales of the Nook devices to drive content sales. We don't track Microsoft cash per se within Nook Media, although we obviously report to them on as we're required. We have a commitment to get them a return on that cash over time and that's what we're going to do. This is the first quarter of the partnership.

It's unclear what exactly Microsoft is getting out of the Nook partnership. It's possible that Microsoft is getting technology and publishing agreements. Perhaps Microsoft gets to pick over the Nook carcass if the division completely flops. In any case, if this first quarter from Nook is any indicator of future success, Microsoft has a $300 million clunker on its hands.

Topics: Tech Industry, Microsoft, Mobility, Tablets

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33 comments
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  • Microsoft's $300 million Nook investment already looks like a clunker

    That's an odd headline for this blog post considering you don't know what the money is being used for.

    "It's unclear what exactly Microsoft is getting out of the Nook partnership."

    Yet you feel qualified to say Microsoft's investment is a clunker but don't now how the money is being spent. Do you see the problem here? Maybe they are using it for expanding like they said they would.
    Loverock-Davidson
    • But I'm sure if

      you simply replaced MS with 'google' as the nook investor you'd completely agree with the article and go into how google fails with everything they do. MS seems to have the exact opposite of the 'midas touch', instead everything turns to something more, well, brownish.
      drwong
      • I think it's called

        The manure touch
        Alan Smithie
    • I don't see where this is related to Nook's MS deal

      I fail to see how MS' investment in Nook, has anything to do with Nook's declining Android based tablet sales. If anything, comments made by Barnes & Noble point a future for Nook - absent of Barnes and Noble engaging in hardware sales. If the MS / Nook deal leads to true user experience innovations in Nook software on the Windows platform, I believe Barnes and Noble can dominate online publishing. As of now, I see little differentiation between content in Windows apps, and content on other platforms and on the web. There really does need to be significant differentiation for publishers and companies like Barnes and Noble to make money. E.g. ebooks having immersive experiences which are supported by unique content such as animations, proprietary referencing systems, forums, access to additional learning materials, integrated voice and other types of communication, etc., really are required for players like Barnes and Noble, and the online publishing industry to really take off.
      P. Douglas
    • It's pretty obvious

      Microsoft folded after B&N called their bluff and went ahead with the lawsuit. This was a settlement payment.

      Microsoft managed to fail again.
      spinit
      • What on earth makes you think B&N won anything?

        When a company loses a patent lawsuit their "settlement" doesn't include taking part ownership in the "winning" company.


        Do you think there was some sort of secret trial where B&N defeated Microsoft?
        Do you think B&N saying no to Microsofts patent claims were so intimidating that Microsoft just opened up their checkbook?
        Do you think B&N somehow defeated Microsoft and then just gave them a part of their business?
        Emacho
        • Re: What on earth makes you think B&N won anything?

          Three. Hundred. Million. Dollars.
          ldo17
          • That is a one sided view

            B&N lost 18% of their Nook division, gave MS direct access to their book library and college book stores and shares digital book sales revenue. All that went to Microsoft.

            I've never heard of a legal victory where such huge assets were taken from the winner and given to the loser. Not that anyone can state what B&N was awarded "damages" for since they had no patent claims against Microsoft.
            Emacho
  • He's obsessive. I honestly thinks he suffers from OCD

    He's fixated on certain people here, and on a particular company to the point he's insulting, narrow minded, delusional, and outright creepy.

    He does think he's a laugh of minute, but I figure since he has nothing in the real world, we'll let him have it.

    I don't like being cruel.
    William Farrel
  • Re: MS huge edifice is crumbling as I.T. moves to a Cloud model

    The MS huge edifice is crumbling as I.T. moves to a Cloud model. MS is simply trying to "buy" sales figures for Windows 8 in order to cover up the failure of Windows 8.

    Equally, they are trying to prop up collapsing Dell.

    It is like a Hollywood disaster movie!

    Shareholder should act or see their billions waste to millions over 3 years, at which point MS will simply be a smaller Asset company.

    I guess if the share price collapses they might try a buy out like Dell!

    The movement in UK and Internationally is to dump MS licenses for Open Source Cloud solutions. As to the USA I expect misguided loyalty will persist for a year more.
    Rich K
    • bs

      More BS talk without figures....

      Show me the figures for the millions of people abandoning MS software...

      Seriously you need a hobby other than spouting BS on a blog.
      danjames2012
    • Bleh...

      n/t
      Ram U
    • Well Rick K, if that fairy tale helps you sleep at night

      you keep telling yourself that, some good will come out of it.

      The rest of us have to live in the real world, and base our decission around the reality that non of what you said is true.

      Sorry if that hurts.
      William Farrel
  • I have to think this deal was all about access to content

    This seems like Microsoft trying to secure rights to books for their futre far more than they might be interested in supporting Android based tablets.

    At the least this puts Microsoft directly into B&N if/when things start going bad and that will make it less attractive to any other suiters who might try to get involved with B&N.

    At the best I think MS/B&N team up on a windows8 Nooks that solves all the Android based Nook problems. B&N gets to sell books and Microsoft supplies the other content that is sorely missing on the Android based Nooks: Apps, music, movies while getting access to the books section of B&N for their offerings.
    Emacho
    • Much like Nokia

      Plus, who thought a quarter was enough time to judge this?

      I could see something where MS is supplying the OS and other content for the devices and in return B&N ports book content to all Windows 8 devices. At a discounted rate ideally. Just like Nokia does with their services now. Nokia Maps powers Bing now. Nokia Drive provides the GPS navigation solution for all WP8 devices. Nokia Transit same thing. And I would imagine Nokia Music will end up going to all WP8 devices as well. The whole ecosystem benefits from a partner like that. Maybe B&N will be the same.

      Or, it's a $300 million wasted investment, a risk if you will. Let's not forget we're talking about MS, that's a very small risk in their world.
      LiquidLearner
      • Great points

        I don't think 1 quarter is enough time to judge the new Nooks, but the coming months are only going to get harder for the Nook. Good hardware and a decent price was the Nooks only advantage and that continues to erode as other affordable Android tablets enter the market.

        The problem with the Nook isn't the hardware though, but rather the software (or lack of in terms of apps/content).

        Likewise I think you are correct in the assumption that MS is involved with B&N for their content as well as sales channels into colleges. B&N on the otherhand desperately needs a digital sale platform where it can do better than what the Nook is offering.
        Emacho
  • Depends ...

    If the investment in Barnes & Noble saved Microsoft from a defeat in the court battle between the two companies over patents, it was probably money well spent.
    Rabid Howler Monkey
    • Bingo!

      MS knew they woud most likely loose in a court battle. So they "partnered" with B&N, the suit was dropped and MS is free to use it's threats.

      Motorola/Google is up next and I hope someone has the Nuts to take MS to court.
      itguy10
      • erm

        Motorola already has.... and they are getting spanked so I wouldn't hold out hope...

        All Motorola needs now is its own meme

        "Sues MS"

        "Investigated for patent abuse by EU"
        danjames2012
      • Sorry for your disapointment, itguy10

        (because once again when your hopes don't pan out, your disapointed)

        B&N knew they would most likely lose in a court battle. So they "partnered" with MS the suit was dropped and B&N is free to live another day.

        Motorola/Google is up next and it doesn't look like they have Nuts to take MS to court.

        So, once again, I'm sorry things aren't working out that well for you.
        William Farrel