Will Google Acquire the Nook?

On Thursday Barnes and Noble announced that the company may spin off its successful Nook business.  Barnes and Noble stock dropped 17% on this news along with other reports that the company increased its loss estimates for the quarter. Barnes and Noble’s total revenues are expected to fall in the range of $ 7-7.2 billion which is slightly down from higher guidance on August 11′ of $7.4 billion. Over a month ago, Barnes and Noble had projected revenues of 1.8 billion for the Nook business compared to the 1.5 billion which was lowered yesterday, representing a 17% drop.

Many investors and Nook readers alike were surprised by the news that Barnes and Noble is considering to spin off their popular Nook business. Digital e-reading is still in the early phase of growth and has plenty more upside growth potential.
CEO Lynch was interviewed this morning on CNBC Squawk on the Street and admitted to CNBC Host David Faber that there was a forecasting mistake. Barnes and Noble anticipated higher growth with the Nook Simple Touch, a lower level black and white Nook e-reader. The miscalculation by B & N’s management was a costly mistake that impacted Nook revenues.
Barnes and Noble is spending a significant amount of money to market their Nook products, including their positively reviewed and well received 7 ” Nook Tablet, a color e-reader that is supported by Android software for web surfing. 
Today’s article in the Wall St. Journal quoted Kantar Media, an ad tracking unit of WPP PLC whose own estimates reveal that Barnes and Noble’s spending on advertising has more than tripled since 2009. 
Barnes and Noble’s significant marketing and research investments with their Nook lineup is impacting Barnes and Noble’s bottom line despite the fact sales with the Nook Tablet have been gaining momentum along with their digital content sales. 
Nook unit sales have grown 70% year over year ending 12/31. Digital content sales have increased 113%.
But the Nook is competing directly against Amazon’s Kindle products, including their new Kindle Fire, which is expected to have stronger overall unit sales. They are also competing against Apple e-reading content with their i-Pad.
According to IHS estimates, Barnes and Noble has gained 13% of the e-reading market while Amazon has 67% of the market and 20% is in the other category.
Barnes and Noble appears to lack the necessary financial firepower to maintain their margins which includes their brick and mortar stores while also keeping up with their costly investments related to the Nook. 
Although Barnes and Noble’s EBITDA (earnings before interest, taxes, depreciation, and amortization) fell to $ 163 million in the quarter ending April 30,2011, CEO Lynch pointed out on CNBC this morning that EBITDA is still growing this year.
Speculation has been growing about the fact that if Barnes and Noble’s separates its Nook business and spins it off, there could be other larger tech companies with deeper pockets that may be willing to partner with Barnes and Noble to invest in its successful Nook business. Large sums of cash are still needed to support Barnes and Noble’s aggressive marketing plans for the Nook along with continued spending for research and development to keep Nook products competitive in the market next to tech giants Amazon and Apple.
Google is one company that has emerged lately as a potential buyer although the company declined to speak to Wall St. Journal when questioned further about the topic. Read about the Google-Nook speculation here and here and here.
Unlike Apple or Amazon, Google does not have content brand recognition moving forward in an era when owning content is becoming more essential to gain a competitive advantage. 
A future investment in Barnes and Noble’s Nook lineup, which already runs Google’s Android, could enhance Google’s content platform.
Currently, Google sells Google e-books but they have not become widely successful thus far.  Acquiring the Nook business or becoming a primary investor in the Nook Tablets may accelerate Google’s content offerings and expand their digital reading footprint in this growing market.
Now that Apple is creating their own retail wing at Target and Grand Central Station while Amazon is rumored to possibly team up with Seattle cousin Micorsoft when they release a Amazon phone…….it might be smart for Google to partner with Barnes and Noble, tap into their huge wealthy client base, and establish a deeper retail presence inside B & N’s bookstores which are found all across the country.


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