Barnes & Noble Plays Into Amazon’s Hands

by Jonathan Berr | August 15, 2012 9:08 am

Barnes & Noble’s (NYSE:BKS[1]) decision to slash prices on all three of its 7-inch Nook models backfired. Instead of focusing on the Nook, which has about 30%[2] of the U.S. e-books market, much of the news media coverage has dwelled on the plans that Amazon (NASDAQ:AMZN[3]) has for the Kindle, which has more than double the Nook’s market share.

The Seattle-based e-commerce company has yet to announce its plans for the Kindle, but the Nook price cut has whetted the public’s interest in Amazon’s tablet. By preemptively cutting prices on the Nook, Barnes & Noble has signaled to the market that it believes Amazon is up to something so cool that it had little choice but to react ahead of time.

Indeed, there is a palpable lack of enthusiasm for the Nook in the media coverage of the price cut.

“For now, those who want a cheap but fully functional tablet should stick with the Nexus 7 or, to a lesser extent, the Kindle Fire,” writes Hayley Tsukayama in the Washington Post[4]. “But if you’re simply looking for a deluxe e-reader that you can use for some apps, some video and some light browsing, it’s worth taking a second look at the newly cheaper Nook.”

Barnes & Noble, whose shares have slumped nearly 8% this year despite getting a $605 million Microsoft (NASDAQ:MSFT[5]) investment in its e-reader business, won’t be able to sustain its market share if the Nook is considered a low-cost, pedestrian alternative compared with cooler rivals.

The history of technology is chock-full of examples of products — from Sony’s (NYSE:SNE[6]) Betamax videotape recorder to Research In Motion’s (NASDAQ:RIMM[7]) BlackBerry — that were once considered cool but eventually lost their edges as alternatives appeared. (As a former Betamax owner, I have a personal interest in this issue.) The Nook may face the same fate as competition in e-readers intensifies seemingly every day.

For instance, Google‘s (NASDAQ:GOOG[8]) Nexus 7, which recently went on sale, has won over some of the top tech critics[9], including David Pogue of The New York Times and The Wall Street Journal’s Walt Mossberg. And of course, there’s Apple (NASDAQ:AAPL[10]), which is rumored to be developing a mini-iPad, according to various media reports[11].

All hope, though, isn’t lost for the Nook, which has legions of fans.

Barnes & Noble earned kudos from reviewers earlier this year when it released the Nook, which glows in the dark to allow people to read their favorite books at bedtime. Maybe the Microsoft money will help it create even better e-readers and help it market the Nook in overseas markets.

Wall Street hasn’t given up on the New York-based company, either. Analysts have an average 52-week price target of $20.75 on BKS stock, well above where it trades now.

However, buying Barnes & Noble’s stock now would be a mistake. The shares appear priced for perfection. They’re likely to plunge at the slightest sign of uncertainty, which in this company’s case is lurking around every corner.

Jonathan Berr does not own shares of the listed stocks. Follow him on Twitter @jdberr.

Source URL: https://investorplace.com/2012/08/barnes-noble-plays-into-amazons-hands/

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