Barnes & Noble Union Square in November. Photo by Tim Carmody/Wired.com

The e-reader business may be moving faster in the last six months than it did in the previous six years. Even Barnes & Noble, the brick-and-mortar book retailer that’s best managed the transition to digital reading, has been taken by surprise.

Now the company has to reread, restock and re-sort its own future — possibly one where the B&N and the Nook go separate ways.

A separate Nook business may be able to attract new investment and partnerships and innovate more quickly

In a press release Thursday, CEO William Lynch announced that the company is beginning “strategic exploratory work to separate the Nook business.”

“We see substantial value in what we’ve built with our NOOK business in only two years,” Lynch says, “and we believe it’s the right time to investigate our options to unlock that value.”

The brand-new Nook Tablet, for example, has been a great success. It’s already the company’s fastest-selling device and outperformed expectations over the holidays, even though it faced stiff competition from Amazon’s Kindle Fire. Driven by the $250 Nook Tablet and its older sister device, the $200 Nook Color, Lynch says Nook will do $1.5 billion in sales this fiscal year and continue growing into 2012 and beyond.

So what’s the problem? Even though Nook set records, and overall retail sales for the holidays were up, sales of the Nook Simple Touch e-reader were disappointing. A price cut from $140 to $100 to match the new Kindle Touch couldn’t give the six-month-old Touch enough of a boost going into the holidays. B&N doesn’t release raw sales numbers of individual units, but whatever they were, they weren’t enough to meet the company’s expectations.

The good news, as Lynch notes, is that consumers appear to prefer color e-readers, validating the strategy B&N introduced in 2010 with the Nook Color.

The bad news is that the company has had to radically revise its earnings projections. Initially, B&N projected earnings before taxes, interest, depreciation and amortization (EBTIDA) of $210 million to $250 million. In December, the guidance offered was at “the lower end” of that figure. Now the company has revised its expectations again, to just $150 to $180 million. So after taxes and other non-operating expenses, B&N will most likely lose quite a bit of money, somewhere between $1.10 to $1.40 per share.

The drop in demand for the Nook Simple Touch and the cost of advertising the other Nook devices takes most of the blame for the drop in expected profit.

The timing couldn’t be worse. The company’s already looking to sell Sterling Publishing, the in-house book publisher that it acquired in 2003 and consolidated in 2009. The growth of the brick-and-mortar retail business is slowing, even though the economy has picked up a bit and the stores now sell more high-profit items like toys and electronics. BN.com (which includes both e-books and web sales of books and other goods) is still the smallest segment of B&N’s business. It’s much smaller than the retail or college divisions, and it still loses money — almost $59 million in Q2 [PDF].

Meanwhile, the e-reader business is growing, but is also undergoing tectonic shifts in pricing, form factors, content types and reader expectations. It doesn’t matter that Nook anticipated and helped precipitate many of these changes. They make the business unpredictable.

For the most part, bookstores and their investors do not like unpredictability. If they did, they’d be venture capitalists. They also don’t have years to wait. Nobody wants to be propping up the next Borders while the next big thing is always just around the corner.

Barnes & Noble has scooped itself out of Borders’ fate before. How do they do it again? And what does all of this mean for the still-developing e-book and e-reader industry?

Continue reading ‘Barnes & Noble Aims to Separate Nook Biz With An Eye for Global Markets‘ …

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