B&N profiting from Nook

[azayn]

https://goodereader.com/blog/electro...ook-profitable

So basically they were able to make money by outsourcing Nook production and support to India. What I found interesting is the same company that makes Kobo ereaders also manufactures Nooks. They could make the Nook better if they wanted to, but whatever passion B&N had for e-readers is long gone. Now they seem content to being a distant second to Amazon and just milk the e-book cow for as long as possible.

[pwalker8]

Originally Posted by azayn

https://goodereader.com/blog/electro...ook-profitable

So basically they were able to make money by outsourcing Nook production and support to India. What I found interesting is the same company that makes Kobo ereaders also manufactures Nooks. They could make the Nook better if they wanted to, but whatever passion B&N had for e-readers is long gone. Now they seem content to being a distant second to Amazon and just milk the e-book cow for as long as possible.

Profitability by outsourcing and cost cutting rarely works long term. Eventually you run out of costs to cut. There isn't a whole lot of cash cow there to be milked.

[GlenBarrington]

Originally Posted by pwalker8

Profitability by outsourcing and cost cutting rarely works long term. Eventually you run out of costs to cut. There isn't a whole lot of cash cow there to be milked.

Yeah, those are pretty much short term survival strategies. Clearly they don't want to cede the eBook market in the USA, at least, to Amazon. Getting out of the eBook business would do that, so they are trying to minimize the costs associated with their competition.

Maybe, they need to go "All in" and significantly reduce the number of "Brick and Mortar" stores (maybe become a tourist destination the way the Apple stores are, or B&H Camera is in NYC) and concentrate heavily on eBooks. Maybe even produce books in some sort of Mobi/Kindle friendly format. Do the reader devices REALLY matter all that much except as a way to generate book sales?

I know, I would love a mainstream alternative to Amazon to populate my Kindle with. And if I could buy books without DRM, I would love it even more.

Whatever B&N does, I think it needs to be bold, and be a "bet the farm" move. I don't see their current path as doing anything but delaying the inevitable Amazon win.

[rcentros]

Originally Posted by azayn

So basically they were able to make money by outsourcing Nook production and support to India. What I found interesting is the same company that makes Kobo ereaders also manufactures Nooks. They could make the Nook better if they wanted to, but whatever passion B&N had for e-readers is long gone. Now they seem content to being a distant second to Amazon and just milk the e-book cow for as long as possible.

Pretty much true, although it doesn't look like the quality control Netronix brings to Kobo manufacturing is all that stellar either (lighting seems to be some kind of issue with every new device release). But, in fairness to Netronix in regards to the Nook, the Nook's issues seem to be more with software than with hardware and that wouldn't be Netronix's fault.

[rcentros]

Originally Posted by pwalker8

Profitability by outsourcing and cost cutting rarely works long term. Eventually you run out of costs to cut. There isn't a whole lot of cash cow there to be milked.

That's what I was thinking. And Barnes & Noble seems to be admitting that.

[ZodWallop]

It's a shame the way B&N bungled Nook. In the early days they were running neck and neck with Kindle. I remembered being wowed when the Nook ST with Glowlight first rolled out.

When I bought one, Barnes and Noble pushed the more open nature of the Nook. That it read epubs and you could buy those from stores other than B&N, that the Nook had expandable memory. They were even known for having very easy to crack DRM, so your Nook books didn't feel like a lock-in.

I think B&N wasn't ready for the Nook's success. And then they made an unannounced switch the DRM (which pissed off the hard core fans) and released the Nook Glowlight with only 512MB for sideloading. It was like they were a different company.

[Pajamaman]

They're hanging in there. Not sure why. I presume they have a strategy and hope to bring it back. I hope they do. Competition is good.

[ZodWallop]

Originally Posted by Pajamaman

They're hanging in there. Not sure why. I presume they have a strategy and hope to bring it back. I hope they do. Competition is good.

I think they have to hang in there. If they were to give up their online presence it would feel like the final nail in their coffin. There doesn't appear to be a bright future for a brick and mortar only mega-chain.

[pwalker8]

Originally Posted by ZodWallop

It's a shame the way B&N bungled Nook. In the early days they were running neck and neck with Kindle. I remembered being wowed when the Nook ST with Glowlight first rolled out.

When I bought one, Barnes and Noble pushed the more open nature of the Nook. That it read epubs and you could buy those from stores other than B&N, that the Nook had expandable memory. They were even known for having very easy to crack DRM, so your Nook books didn't feel like a lock-in.

I think B&N wasn't ready for the Nook's success. And then they made an unannounced switch the DRM (which pissed off the hard core fans) and released the Nook Glowlight with only 512MB for sideloading. It was like they were a different company.

Yep, they had all the advantages for ebooks over Amazon, but unlike Amazon, they never really got two idea. First content is king. They went the Apple route of just mainline books without investing heavily in getting everybody and their brother to put ebooks on their platform like Amazon did. Second, their big advantage was their B&M stores, but they never really used that advantage. Sure they had a booth to sell nooks, but they never did any sort of tie in between the ebooks and the stores to leverage that advantage.

[azayn]

Originally Posted by Pajamaman

They're hanging in there. Not sure why. I presume they have a strategy and hope to bring it back. I hope they do. Competition is good.

As poor as Nook sales are in the US, they just barely exceed Kobo sales worldwide so there's still money to be made. And with business dwindling at their brick and mortar stores, it makes sense to diversify into ebooks.

Originally Posted by ZodWallop

It's a shame the way B&N bungled Nook. In the early days they were running neck and neck with Kindle. I remembered being wowed when the Nook ST with Glowlight first rolled out.

When I bought one, Barnes and Noble pushed the more open nature of the Nook. That it read epubs and you could buy those from stores other than B&N, that the Nook had expandable memory. They were even known for having very easy to crack DRM, so your Nook books didn't feel like a lock-in.

I think B&N wasn't ready for the Nook's success. And then they made an unannounced switch the DRM (which pissed off the hard core fans) and released the Nook Glowlight with only 512MB for sideloading. It was like they were a different company.

Call my crazy but I think B&N could still turn things around if they decided to get serious about e-books. Now that Amazon is focused on things other than books, B&N has an opportunity to carve a niche for themselves in the reader market by making e-books a central focus. Revamping the website, rolling out more inspired Nook hardware, and using their stores to spotlight the Nook could get people talking again.

Since they use the same company that manufactures Kobo, there's really no excuse for them not to offer a more compelling e-reader. Otherwise whatever little market share they have left in the US could shrink further once Kobo enters the US market through Walmart.

[DNSB]

Originally Posted by azayn

As poor as Nook sales are in the US, they just barely exceed Kobo sales worldwide so there's still money to be made. And with business dwindling at their brick and mortar stores, it makes sense to diversify into ebooks.

An interesting claim about Nook sales in the USA exceeding Kobo sales worldwide. Do you have a reference for that claim? The only numbers I have seen show Kobo as the #2 ereader manufacturer for the last few years (and B&N is not #1).

[azayn]

Originally Posted by DNSB

An interesting claim about Nook sales in the USA exceeding Kobo sales worldwide. Do you have a reference for that claim? The only numbers I have seen show Kobo as the #2 ereader manufacturer for the last few years (and B&N is not #1).

Oops, I meant Nook e-book sales not devices. I haven't seen the numbers for e-reader sales but I too believe Kobo leads B&N in hardware sales. Here are the stats on worldwide sales of ebooks as of 2017: https://goodereader.com/blog/e-book-...ooks-than-kobo

[DNSB]

Originally Posted by azayn

Oops, I meant Nook e-book sales not devices. I haven't seen the numbers for e-reader sales but I too believe Kobo leads B&N in hardware sales. Here are the stats on worldwide sales of ebooks as of 2017: https://goodereader.com/blog/e-book-...ooks-than-kobo

One issue with those numbers is that they choose only 5 English speaking countries. Looking at one set of numbers I ran across that discussed the top 10 countries for ebook sales, the only three common to the AuthorEarnings report were the US, UK and Canada. The US and UK were the top two on the list followed by Germany, France and Japan ahead of Canada on the list followed by Italy, Spain, India and Brazil.

Admittedly, I personally think a lot of the numbers being bandied around are built on a basis that makes the average kid's sand castle look like a miracle of engineering.

[pwalker8]

Originally Posted by DNSB

One issue with those numbers is that they choose only 5 English speaking countries. Looking at one set of numbers I ran across that discussed the top 10 countries for ebook sales, the only three common to the AuthorEarnings report were the US, UK and Canada. The US and UK were the top two on the list followed by Germany, France and Japan ahead of Canada on the list followed by Italy, Spain, India and Brazil.

Admittedly, I personally think a lot of the numbers being bandied around are built on a basis that makes the average kid's sand castle look like a miracle of engineering.

Most of those numbers are finger in the wind estimates at best, but in broad terms, can show where each bookstore stands, i.e. Amazon 80%, Apple 10%, Kobo and B&N 2% to 3%. I would guess that the difference between Kobo and B&N is within the margin of error of the estimates.

Apple is also revamping their bookstore and book app, so it could be that companies are seeing an opportunity to whittle down that huge Amazon market share a bit.

[fjtorres]

Uh, the Nook "profits"...actually aren't quite *profits*...
(Look at the source, folks. Better yet, look at the full picture.)

Here's a couple more detailed sources:

http://www.marketingtools365.com/bar...ncial-results/

https://seekingalpha.com/article/418...all-transcript

If you look at the transcript of the latest investors call, you'll see that what Nook generated is $3.5M of EBITDA.

EBITDA
Earnings Before Interest, Taxes, Depreciation and Amortization. An approximate measure of a company's operating cash flow based on data from the company's income statement. Calculated by looking at earnings before the deduction of interest expenses, taxes, depreciation, and amortization. The formula is: EBITDA = Revenue -- Expenses (excluding interest, taxes, depreciation and amortization)
This earnings measure is of particular interest in cases where companies have large amounts of fixed assets which are subject to heavy depreciation charges (such as manufacturing companies) or in the case where a company has a large amount of acquired intangible assets on its books and is thus subject to large amortization charges (such as a company that has purchased a brand or a company that has recently made a large acquisition).
.
.
.
In general, EBITDA is a useful measure only for large companies with significant assets, and/or for companies with a significant amount of debt financing. It is rarely a useful measure for evaluating a small company with no significant loans.

http://www.investorwords.com/1632/EBITDA.html

That is not a useful way to look at a unit of a larger business because there are ways of shifting costs around to other units (like the costs associated with the disappearing Nook Kiosks at B&N stores) and other charges like depreciation and write downs/write offs.

It is a particularly bad way to look at a shrinking unit because it won't include the depreciation of the backend of the unit or the loss in value of the full unit. If you look at the full report, B&N took losses in goodwill and cash to the tune of $128M. Those loses came from:

The full-year operating loss was $128 million inclusive of $167 million of nonrecurring or unusual items.

The $176 million is comprised of four items; $136 million of non-cash asset impairment charges, mostly goodwill; $16 million of nonrecurring severance costs primarily resulting from the implementation of the new store labor model; $5 million of strategic consulting as we transform our business; and $10 million of markdowns declared non-returnable merchandise.

Lots of loses not included in those EBITDA numbers. No taxes either.
Three things to consider about Nook numbers:

1- there is no telling where the EBITDA positive cash flow comes from: ebooks, ereaders, or the Samsung tablets Nook is peddling. Note that the source hyping the "profits" is the same source that a while back was using Nook as *proof that ereaders are dying*. We do know that the number of ebooks Nook sells are continually dropping each quarter and if that had changed they would be bragging about it the way they used to brag about the number of active Nook customer accounts. For all we know, the cash flow might be from the Samsung tablets, not actual Nook products.

2- If you look at the bottom line charges not included in EBITDA there is a $10M charge for "non returnable items". It could be for a number of things: the non-book merchandise in the stores, the exclusive signed pbooks they were selling for the holidays...or it could be for unsold Nook hardware. Wouldn't be the first time they had to write down the value of Nook hardware, would it?

3- it is no secret that B&N has been trying to sell the Nook unit for years and have found no takers. Reporting a positive cash flow is one way to make it look somewhat valuable (and there is still some value in it, if the price is low enough) and pump up the potential sale price. I could see WalMart or Microsoft buying it for something like $20-30M (and taking a goodwill write off the next year, much like Rakuten ended up doing with Kobo). So far, though, nobody has stepped forward and WalMart has (theoretically) something going on with Kobo and MS is going forward on their own after their fiasco teaming up with B&N.

The problem is there are too many unknowns with that positive cash flow; where does it come from? eBooks, ereaders, Samsung tablets? Not much value in Nook if the money comes from selling Samsung tablets.

A bit more value (mostly from the brand) if the money comes from the outsourced ereaders. (But ereaders are supposed to be a dying market, right?)

ebooks? Well, the caveat there is that buying into Nook is spending money to try to compete against Amazon in a market were Nook's primary "partners", the BPHs, are pricing their product to *minimize* sales. And bragging about it. As part of B&N, high ebook prices might drive some online pbook sales (though those are also declining) but as a standalone business or as a unit of a different business?
B&N has simply scared off too many ebook customers.

They may be dressing Nook up for sale but there really isn't much there for a buyer to be interested in.

The "profits" may or not be real but even if they are the numbers aren't all that meaningful. $3.5M EBITDA on sales of $112M isn't much to brag about other than " it's not bleeding us dry anymore". And that is the best possible spin, assuming the post-EBITDA charges are solely from the dry goods side of B&N.

It's nothing to get excited over.
It's not going to forestall the ongoing expectations of a B&N bankruptcy sometime in the next year or two.