ReadWriteWeb DeathWatch: Barnes & Noble

Barnes & Noble remains a big player in a growing industry, and until Google changed everything this week, it made fantastic hardware for the money. But as with Nokia, a changing market and financial problems are driving a proud Number Two into a subordinate role that threatens to choke it out of existence.

The Basics

Barnes & Noble was the king of the book superstore. In the early 1990s, the company revolutionized the book industry by going big, wiping out the little guys with economies of scale. At the end of the decade, as Amazon lured users with its online logistics edge, Barnes & Noble clawed back to a strong second spot with streamlined operations and an online push.

And when e-readers hit the market, Barnes & Noble had the foresight to launch its own device, the Nook, while its closest competitor, Borders, sold third-party devices. The decision worked for Barnes & Noble, which built the Nook into a nearly $2 billion business, while Borders has stumbled into bankruptcy.

In April 2012, Barnes & Noble and Microsoft entered into an agreement to create “Newco,” a Nook-centric company that would combine educational and digital business lines, and create new, complementary products. Microsoft reportedly paid more than $300 million up front for a 17.6% stake, pledging an additional $300 million over time.

The Problem

Barnes & Noble is a one-trick pony in an industry full of device, platform and content convergence. For the most part, Barnes & Noble has remained a bookseller, and that narrow focus has relegated the former goliath to a bit player.

Microsoft’s infusion of cash into “NewCo” after yet another quarterly loss has helped the company deal with amped-up competition from the Kindle Fire and other e-readers. Still, like another prominent Number Two player, Barnes & Noble’s financial woes have forced the company into an unbalanced relationship with its Seattle benefactor. Microsoft gets a physical presence and access to the growing educational market – a traditional Apple stronghold. Barnes & Noble almost certainly gets pressured to build a low-margin Windows-based Nook, so Microsoft has something to compete with the Kindle Fire and the new Google Nexus 7 tablets.

Physical bookstores are dying, and content sales are becoming more device-dependent. Google and Amazon have deep enough pockets to aggressively market loss-leading tablets. Barnes & Noble doesn’t. Microsoft does, but who knows if it will cut its losses and run if the going gets rough - or if it decides to focus on Windows tablets like the Surface. For Microsoft, the education market is just a nice-to-have. Barnes & Noble doesn’t have that luxury.

The Players

Barnes & Noble CEO William Lynch gets digital retail. He’s run e-commerce for Palm, Gifts.com and HSN.com, and unlike the Riggio brothers (Founder and Chairman Leonard and Vice Chair and former CEO Steve), Lynch isn’t hamstrung by an emotional attachment to paper books. He also understands the opportunities of Barnes & Noble’s physical stores, like linking book reviews into Nooks via NFC chips. He has a rough road ahead, but Lynch may be Barnes & Noble’s greatest asset.

The Prognosis

The Nook, as an entertainment and collaboration device, is not on par with competitive tablets. That may be fine for consumers who just want to read e-books, but over time it’s likely to lose out to inexpensive yet full-fledged tablets. With Newco, Barnes & Noble and Microsoft might have a shot at capturing a solid chunk of the nascent educational e-book market, but they’ll have to demonstrate success relatively quickly or Microsoft could decide the push isn’t worth the effort. Barnes & Noble may not fold anytime soon, but it’s on a path toward increasing irrelevance.

Can This Company Be Saved?

Absolutely, but it’s going to take a lot of work and a bunch of luck. Google’s new tablet will hurt Nook’s direct sales, and Barnes & Noble will need to find new ways to get users into its ecosystem - for example, aggressive bundling of devices with textbooks. The company’s future may boil down to how much help Microsoft chooses to give. If the Surface and other products promote the Nook store, and if Microsoft cuts a licensing deal for low-cost Nook devices with the power to challenge Google, Barnes & Noble has a decent shot at long-term survival. If the competition gets ugly and Microsoft cuts and runs, as it has before, Barnes & Noble will likely fade away. Even if Lynch plays all his cards right, he might still lose the game.

DeathWatch Victims So Far

Research In Motion: Things are hurtling downhill even faster than expected. Massive losses - more than 11 times worse than expected - and new delays in its Hail Mary BlackBerry 10 operating system update have made the company's dire situation even harder to ignore.

HP: No change in status

Nokia: No change in status

38 Studios: No change in status