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Barnes & Noble Is Separating Nook

Sejuti Banerjea

Barnes & Noble (BKS) has announced that it will be separating its Nook business, which includes its ebooks, devices and accessories from its core retail business, which includes its book stores and BN.com. The company has been making losses for a while now, most of which was contributed by this business.

Separating Nook will enable it to focus on software and content. Besides, management has said on various occasions that building a hardware unit had put too much pressure on operating costs. But the search for a buyer proved fruitless, despite rumors last year of a possible buyout by Microsoft (MSFT), which has around a 17% interest in the brand. British publisher Pearson plc has a 5% stake.

Two problems have plagued Nook, both of which originate with Amazon (AMZN), its main rival in the book business. First, Amazon was quick to anticipate the need to sell books online and then the need to sell digital versions. This gave it a first mover advantage and enabled it to pick up most of the online traffic. It built on this advantage with its devices, apps and Prime memberships.

The second problem was with respect to Amazon’s pricing strategy (it continues to sell books or devices at little or no profit). This makes it extremely hard for the competition to take away share by pricing aggressively. These factors have made Nook unattractive for a prospective buyer.

But things could be changing now. Earlier this month, BKS announced that it was relocating to a couple of smaller offices and saving $102 million in the process (spread out over the period of the lease).

It also announced a hardware partner in Samsung, which would manufacture a new 7-inch tablet, co-branding it as Samsung Galaxy S4 Nook to hit stores in August. Barnes & Noble will provide software support and content and buy a million tablets in the first year after launch (could be extended to 15 months if sales fall short of projections).

Samsung entering the picture makes it much more interesting. Although it hasn’t commented on what it is getting out of the deal, there are a few possibilities. First and most obvious is the profit from hardware sales. Second, it could get a store-in-store facility at BKS stores, similar to what it has with Best Buy (BBY). Samsung seems to have gotten much more interested in content of late, closing its own ebook store to offer a Kindle for Samsung app for Galaxy devices using Android 4.0 and up from July 1.

Amazon has a Zacks Rank #4 (Sell) while Barnes & Noble has a Zacks Rank #3 (Hold).

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