Bad News for the Nook?

Barnes & Noble announced today that they're getting out of the manufacturing business. It is their intent that in order to cut losses, they won't make any more Nooks. They'll design them, make apps for them, support them with their catalog, but won't build them without outside help.

Here's the original text:

The company plans to significantly reduce losses in the NOOK segment by limiting risks associated with manufacturing. Going forward, the company intends to continue to design eReading devices and reading platforms, while creating a partnership model for manufacturing in the competitive color tablet market. Thus, the widely popular lines of Simple Touch™ and Glowlight™ products will continue to be developed in house, and the company’s tablet line will be co-branded with yet to be announced third party manufacturers of consumer electronics products. At the same time, the company intends to continue to build its digital catalog, adding thousands of eBooks every week, and launching new NOOK Apps™.

The company will continue to offer its existing inventory of its high quality NOOK® HD and NOOK® HD+ devices at amazing prices through the holiday. As always, Barnes & Noble will provide world-class pre- and post-sales support in its stores for its NOOK HD and NOOK HD+ customers, as well as ongoing software upgrades and improvements to the digital bookstore service.

This move comes despite the fact that a year ago Microsoft announced plans to invest $300 million in the Nook. How bad are the losses?

NOOK EBITDA losses were $177 million for the fourth quarter, which include an additional $133 million of inventory charges as the company adopted more aggressive promotional strategies given the shift in strategic direction. NOOK EBITDA losses were $475 million for the full year, primarily driven by cumulative NOOK inventory related charges of $222 million.

While they managed to outlast Borders, they don't have the means to keep up with Amazon and Apple. It's a shame that this loss continues but perhaps it's for the best. Does B&N really want to be in the electronics manufacturing business when there are so many others out there that excel in it? With all the tablets and e-readers out there already, maybe B&N can stick to its core business of selling books rather than trying to maneuver their way through the cutthroat business of making gadgets. Samsung and Sony make gadgets; they don't sell books. Microsoft has lots of experience in finding the right partners to make hardware. It seems like any of them could be effective partners. If B&N plays it smart and finds a skilled partner, the Nook will survive.

Barnes & Noble Gets Support From Microsoft

While the future of Barnes & Noble's bookstores may be uncertain, the company has helped to ensure its place in the e-reader marketplace by partnering with Microsoft. Microsoft is investing $300 million in Barnes & Noble's Nook digital book business (full article).

"As part of the move, there will be a Nook application included in the new Windows 8, which is scheduled to have a release preview in early June. Later this year, computers and tablets with Microsoft's Windows 8 operating system are expected to go on sale."

This is a complete 180 in Microsoft and B&N's relationship. Previously, Microsoft had sued B&N over patent infringement with regards to the Nook. As B&N is such a smaller company, some have argued that Microsoft was in fact trying to bully its way into the ebook marketplace.

Whatever the truth may be, this is a win-win relationship for both companies. Microsoft gains access to the e-reader and tablet market via ebooks, after giving Apple and Amazon quite the head start (par for the course with Microsoft: see videogame consoles, internet browsers, etc.). Meanwhile B&N gets a much needed shot in the arm to help it compete with Amazon and Apple. Besides giving B&N access to its deep pockets, Microsoft offers access to its technological base. If this goes well, I wouldn't be surprised if Microsoft bought the whole company and either shut down B&N's brick and mortar business or revamped them entirely to mirror Apple stores.

Romance Thrives Amid Economic Gloom

According to NYT article, romance novels are the strongest selling category of fiction, surpassing other fantasy genres such as Sci-Fi. The reason--readers want a happy ending and a story in which fantasies come true.

Romance buyers are not only the most loyal, they are willing to sacrifice other things in order to buy their fix of happiness. And Romance also does well in nontraditional formats.

Romance novels have also captured a larger proportion of the electronic book market than other categories. Whereas most publishers say that about 1 percent of sales come from e-books, Harlequin says that digital editions make up about 3.4 percent of its sales.

At Fictionwise, the e-book seller recently acquired by Barnes & Noble, about 50 percent of sales are romance books, said Steve Pendergrast, chief technology officer. “Romance readers tend to be voracious readers,” Mr. Pendergrast said. “The ability to instantly download and start reading is potentially more important to that audience than any other audience.”

The growing market for digital romance novels has attracted several newcomers, including tiny independent publishers like Ellora’s Cave, Samhain Publishing and Ravenous Romance.