Barnes & Noble Takes on Amazon in a Race to the Bottom
Barnes & Noble reported earnings this morning, and announced a cheaper Nook Tablet to take on Amazon's Kindle Fire
Bookseller Barnes & Noble (BKS) reported so-so third-quarter earnings before the open this morning. But the real news is its decision to raise the stakes in its war of attrition with Amazon.com (AMZN) in the low-end tablet market.
So before we get to the fun stuff, let's take a quick look at Barnes & Noble's earnings numbers.
Earnings per share came in at $0.71, below consensus of $0.96. Excluding the dilutive effect of convertible preferred stock owned by Liberty Media and the deferral of textbook rental revenue, earnings would have been $0.99 per share.
Revenue rose 5% year-over-year to $2.44 billion, which was slightly below consensus. Same-store-sales rose 2.8%, while college sales fell by 3% due to a shift to lower-priced textbook rentals.
BN.com sales were up 32% year-over-year. The company noted that it saw a decline in online sales of physical products, while sales of Nook devices and digital content were up significantly.
For comparison, Amazon's December quarter sales were up 35%, with media sales up 15%.
On the guidance front, Barnes & Noble reiterated the then-disappointing guidance it announced on January 5. (See: Barnes & Noble: Nook Sales Are Great, But They're Killing Us!)
Now that we've got the boring stuff out of the way, let's look at the big thing -- Barnes & Noble's announcement of a $199 Nook Tablet featuring eight gigabytes of memory, which compliments the $249 16-gigabyte model.
Note: Barnes & Noble also cut the price of its Nook Color e-book reader by $30, putting it at $169, though that's not as important as the Nook Tablet pricing.
That $199 price point on the Nook tablet puts it right in line with Amazon's $199 Kindle Fire tablet.
So let's do some math on the tablet market.
Here's a market share breakdown for the fourth quarter of 2011, courtesy of our friends over at Strategy Analytics:
After this data was issued, Peter King, author of the Strategy Analytics report, told Laptop Magazine that the Kindle Fire and Nook Tablet accounted for 40% of the Google (GOOG) Android slice. This means it has taken 16% (40% of 39% is about 16%) of the overall tablet market.
If we back that 16% out of the 39% figure that represents the full Android slice, we get 23%, which is divided up by the likes of Samsung, Motorola, and others.
And since that 23% figure includes low-end Android models, Apple's (AAPL) 58% share tells us that it is probably at least three times as big as the rest of the high end of the tablet market.
Moving on, the Amazon versus Barnes & Noble price war may be great for consumers, but it is incredibly damaging for the Android marketplace because they are undercutting the competition on price while conditioning consumers to expect cheap tablets.
Remember, Amazon and Barnes & Nobles are pricing these devices on the cheap in order to get people into their digital-content ecosystems. They don't care about making money on the devices, and that's disastrous for anyone else trying to make money in low or moderately-priced tablets.
As for who's going to win this war, my money is on Amazon -- a stock which I am incidentally betting against.
My thinking is pretty simple here.
Amazon is a unique company in that it doesn't seem to care about profits. It spends like mad to gain market share and build its revenue base, and I wouldn't put it past the company to take the Kindle Fire down to $179 or $149 in the near future. And in a war of financial attrition, the size of one's wallet and sheer willingness to lose money are what count.
And outside of the tablet pricing issue, in what is one of the most under-covered stories in the business media, Amazon is vertically integrating the book business by signing publishing deals with best-selling authors like Tim Ferriss.
Barnes & Noble just banned books published by Amazon Publishing from its retail stores, and that puts it in a bit of a pickle.
Sooner or later, Amazon Publishing will have some blockbuster book that won't be found in Barnes & Noble stores. This could prove especially disastrous should Amazon gets its hands on the next Harry Potter or Hunger Games. (See: For Lions Gate, 'The Hunger Games' Is 'Guitar Hero' All Over Again)
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