Barnes & Noble Beats Amazon Down to Zero

"The days of the subsidized Kindle -- perhaps even down to zero -- may be on the way," I wrote two years ago. "If The New York Times were to offer two years of prepaid service with a free Kindle included, wouldn't it take e-readers to a whole new level?"

Well, I was early and got the wrong e-reader, but we've finally hit the age of publisher-subsidized e-readers.

Barnes & Noble (NYS: BKS) is offering its $99 Nook Simple Touch for free to bibliophiles willing to pay $19.99 a month for a year's subscription to New York Times' (NYS: NYT) namesake digital paper.

I know what you're thinking. Paying $240 for a year of a digital newspaper sounds like an expensive way to get a $99 e-reader for free.

It can even get more costly.

"After the initial year, your New York Times subscription will automatically continue at the then current price, which you can cancel at anytime, without penalty."

Yes, if you forget to cancel after those first 12 months, the digital reads and monthly bills will keep coming. How many deal seekers will forget their Nook anniversaries a year from now? However, what about the folks that will actually want to keep paying? New York Times is going to hook a lot of digital readers who have told their paperboys to get off their lawn.

Subsidization station
There are no official details on who is picking up the tab here. New York Times would normally be expected to pick up most -- if not all -- of the tab for the Nook, but the bookseller is also rightfully motivated to give the newspaper giant some kind of break here. Just last week Barnes & Noble blamed sluggish sales of its entry-level e-reader as a reason for hosing down its guidance.

In other words, it's a convenient deal. New York Times wants to pump its online circulation, and Barnes & Noble has e-readers collecting dust. The offer is also available as a $100 discount for those seeking to buy the $199 Nook Color.

Buyers angling for the richer features of the $249 Nook Tablet are also in luck if they're into paparazzi and celebrity news. A deal with Time Warner's (NYS: TWX) People magazine slashes $50 off that price -- essentially matching's (NAS: AMZN) Kindle Fire -- for buyers willing to pay $9.99 a month for a full year of that magazine's digital edition.

"The only way to make a dent in Amazon -- or Sony for that matter -- is to create tablets so cheap that newspaper companies can subsidize the costs by sending them out to their willing subscribers." I wrote four years ago, when Amazon and Sony (NYS: SNE) were the only two household names in the e-reader market. The Nook and iPad were still far away from becoming public realities.

I guess I nailed that one.

Your move, Bezos
The only shock here is why Amazon didn't beat Barnes & Noble to the punch. It has seen the prices of its entry-level Kindles go from $399 to $79, so it had to know that publisher subsidization was an eventual reality with every passing price cut.

The New York Times has been its top-selling newspaper since the Kindle's debut ahead of the 2007 holiday shopping season.

Knowing this makes it more than likely that Barnes & Noble is taking a bigger hit here than one would expect. After all, why would New York Times subsidize a $99 Nook Simple Touch before swallowing down the more popular and cheaper $79 Kindle as an incentive to drum up digital subscriptions?

In shocking investors by targeting a deficit this fiscal year of $1.40 a share -- more than double the red ink that investors were expecting -- Barnes & Noble pointed to "additional investments in growing the NOOK business" as a drag on its bottom line. Advertising and international expansion were explicitly mentioned, but taking a hit in cahoots with a major daily would also fall under this category.

Amazon will need to respond. Booklovers don't care about the math behind the scenes to make this freebie work. They're not breaking down who is paying what in the subsidization process. All they see now are free Nooks if they're fans of the widely read daily and cheaper tablets if they're a People person.

Amazon finally has someone hungrier and clearly more desperate to get its e-reader into the hands of users willing to spend on digital media. Amazon can always wait until Barnes & Noble implodes financially, but it can't risk the Nook eating into its market share.

It's time to turn the digital page. The next chapter should be a good one.

The popularity of e-readers, smartphones, and tablets opens the door for some surprising Wall Street beneficiaries. Read up onthree hidden winnersin a free report. If you wait for the report to show up on your Nook, you may be too late to the party, socheck it out now.

At the time this article was published The Motley Fool owns shares of Fool newsletter serviceshave recommended buying shares of Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.Longtime Fool contributor Rick Munarriz does not own shares in any of the other stocks in this story. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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