Is the Nook Fighting a Losing Battle?

Barnes & Noble (NYS: BKS) has fallen prey to the intense competition in the tablet and the e-reader space. While releasing sales data for its Nook tablets, the company stunned investors with the possibility of spinning-off its tablet business to unlock more value.

After the opening bell on Jan. 5, investors spared no time in hammering the stock down more than 30% to the single digits, though it did recover to the $10 mark later.

So, is the Nook dead? Well, I think it is!

Doomed from the beginning
In my opinion, the Nook was doomed from the get-go. I wasn't even a bit surprised when B&N lowered its sales forecast from $1.8 billion to $1.5 billion due to lower-than-expected demand. What do you expect when your closest rival clocks more sales per quarter than you do in a whole year?

So why is B&N contemplating a spinoff, you may ask?

Well, the Nook is downright unprofitable mainly because of the mountain of manufacturing and advertising costs the company has to incur to push it off the shelves. For the first nine months of 2011, B&N flushed down almost $50 million on advertising alone, more than triple of what it spent back in 2009. The company suffered both operating losses and net losses for the past three consecutive quarters. Ouch!

But that's not all. Unlike its rivals, B&N could not make enough money through traditional book sales to subsidize its tablet business. For instance,'s (NAS: AMZN) Kindle Fire tablet, which costs about $250 to manufacture, sells like hot cakes for just $199. The company makes up for this loss through sales of its vast collection of apps and multimedia content.

Now, B&N could go ahead and try to undercut the Kindle Fire. But it wouldn't stand a chance in a head-to-head battle with Amazon. Even cash-rich Apple (NAS: AAPL) is feeling the heat from Amazon's fire-breathing Kindle. According to one analyst, almost 2 million fewer iPads were sold during the holidays due to Amazon's low-priced Kindle Fire, which was a hit with penny-pinching consumers.

Cursed if you do, cursed if you don't
So finally, B&N felt it was logical to explore separating itself from the tablet business. And I feel that it could not have happened a moment too soon. Will the move make things better for B&N? I don't think so.

The spinoff would not make Amazon even take notice, as it would not make any game-changing difference to the Nook as a product. But the spinoff would destroy the little synergies the Nook currently enjoys with B&N. For example, the Nook would not be able to benefit from the good relations B&N has with publishers.

Had the cash-hungry Nook business stayed with B&N, it might have taken down the whole company together with itself. The tremendous costs involved with manufacturing and marketing would certainly take their toll. Plus, the company would also have to continuously upgrade the software and the hardware of the device to keep up with the times.

The Foolish bottom line
Barnes & Noble's plan for a spinoff won't be a game-changer for the Nook. Rather, I feel that if the tablet business were sold off completely, B&N might be able to stop bleeding cash and move on to what it does really well: selling physical books. For now, we'll wait and watch until the company comes out with further details. But for the long run, I feel that B&N minus the Nook would be better off.

So what do you Fools think about B&N's spinoff? Leave your comments in the box below. Also, don't forget to stay informed about B&N by adding it to your watchlist. It's free and lets you stay up to speed with the latest news and analysis for your favorite companies.

At the time thisarticle was published Fool contributor Keki Fatakia does not hold shares in any of the companies mentioned in this article. The Motley Fool owns shares of and Apple.Motley Fool newsletter serviceshave recommended buying shares of Apple and Fool newsletter serviceshave also recommended creating a bull call spread position in Apple. 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.

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