Tuesday, May 01, 2012

Some Soft Nooky

I don’t get the strategy: Sure, I understand that Barnes & Noble wanted to extract the considerable hidden value from their digital (Nook) operations and were seeking a way to do that but, what is the Microsoft play here and should publishers’ be more worried than excited? 

The Nook business is growing at 30+% while physical store sales grew around 2% - which wouldn’t seem so bad if not for the fact that Borders shut for business, and it has long been reported that B&N wanted to carve out the digital business.  Along comes Microsoft and, in a somewhat opaque deal, we now have a “New Co” business worth almost $2bill and in which Microsoft will invest $300+ million.  That amount seems relatively small to a company with the resources of Microsoft and yet this deal is being lauded as Microsoft’s big play into the content business.  Competing with iTunes (mentioned by Forester) seems a big ask given Amazon’s head start although some suggest the Nook is a good example of how to come from nowhere to compete with a bigger player (Kindle).

The nature of the cooperation between B&N/Nook and Microsoft will be borne out over the coming years.  Some investors in “New CO” might be hoping Microsoft stays in Seattle and away from the Nook business since Microsoft’s experience in media content hasn’t been so stellar.  Examples such as their digitization efforts launched to chase Google might have been technically superior but the effort never seemed to get out of second gear.   Each successive time they were lapped by Google their commitment waned until they finally pulled the plug.  Zune was a similar experience: Some people loved the iPod-like device but a thirteen year old girl once summed up the Zune by saying ‘everyone knows when you have to advertise something it’s no good’.

Looking further back, a greater danger to publishers might exist in the example of Encarta, the encyclopedia Microsoft bundled with millions of PCs and in the process effectively destroyed the traditional encyclopedia business.  The traditional publishing business in its’ transition from print to electronic distribution has already witnessed significant price deflation and Microsoft in an effort to sell more hardware (X-Box) and software licenses is likely to jump on the price deflation bandwagon established by Amazon. 

Will Microsoft show impunity to traditional models as they did in the Encarta years?  Perhaps, but their objectives might be simpler: Gaining an anchor tenant to support their mobile strategy.  To me, books are long since a killer application (when was the last time you heard that phrase) moreover, I just don’t see how the relationship with Microsoft benefits Barnes & Noble/Nook other than giving the company a huge valuation on a business that was buried under the vestiges of the physical store model.  I guess you have to start somewhere but will Microsoft and their $300mm influence the trajectory that Nook would have achieved anyway?  I just don’t see it.

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