B&N Investors Salivate Over Microsoft Nook Deal

Barnes & Noble investors reacted with pure unadulterated joy to the possibility that Microsoft is considering entering the e-book market and will acquire the company’s Nook unit for a whopping US$1 billion. Shares rose by a dizzying 24 percent on Thursday, when the rumor surfaced, courtesy of a report in TechCrunch that cited internal documents. By the close of Friday trading, shares were up another 5.6 percent, at $23.31.

Nook Tablet

The Nook Tablet

The Nook is viewed as an underfunded underdog in the fight against Amazon’s Kindle, and to have Microsoft swoop in to save the day is almost a deus ex machina.

“Microsoft could potentially make it a fair fight,” Charles Lewis Sizemore, a Covestor portfolio manager, told the E-Commerce Times.

A Perfect Match

Microsoft has been showing signs of interest for some time: It has already invested US$300 million in the Nook and inked a revenue-sharing agreement for e-books purchased through Windows 8.

The deal would allow B&N to monetize a great asset that is not being fairly valued by the market due to negative perceptions of the old school brick-and-mortar retail model, Sizemore said.

As for Microsoft, it would provide “a new line of business to offset their slower-growing Windows and Office businesses,” Sizemore said.

“As Microsoft is aggressively competing in the tablet market, integrating a Nook app into Windows 8 devices could fill a niche that is not currently being filled,” he pointed out, “and e-books are a very profitable, high-margin business.”

The Xbox has evolved from a video game console into a home entertainment system, Sizemore noted, and adding the Nook to its fold could aid Microsoft’s strategy of building its brand in consumer and entertainment products.

It really is a match made in heaven, suggested N. Venkat Venkatraman, a business professor at Boston University.

“Microsoft is trying to explore every possible avenue to create the third mobile ecosystem around the Windows platform in phones and tablets,” he told the E-Commerce Times, and “B&N needs to offload the Nook business as part of its restructuring.”

One reason B&N shareholders reacted so happily to the possibility of a Microsoft purchase, he added, is that it appears Microsoft is paying a premium to get Nook as it rushes to create a third credible ecosystem.

The Downside

B&N investors should be careful for what they wish for, cautioned David Cadden, a professor in the Entrepreneurship and Strategy Department at Quinnipiac University.

“Although sales in the last quarter were disappointing, the Nook is the single growth vector for Barnes & Noble,” he told the E-Commerce Times. “The sale of the Nook brings in $1 billion to Barnes and Noble; however, it’s not quite clear what Barnes & Noble could do with that money.”

Unfortunately, the big box bookstores may not have much of a future, Cadden continued. “The Nook was one element that drove traffic to such stores.”

Further, the Nook might not fare so well in Microsoft’s hands, he argued. “Its history with devices, particularly tablet devices, has not been particularly rewarding.”

No matter which company owns it, the Nook will have to continue facing down Amazon, Sizemore said, which “is an entrenched competitor and will be hard to unseat.”

Perhaps the only related industry that would be untouched by a Nook sale would be the tablet and e-reader market itself.

E-readers are mostly still loss leaders, Sizemore pointed out. “Many readers — myself included — use free reader apps on our smartphones. This is about high-margin e-books and their platforms, not the readers themselves.”

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Walmart Announces Merchandise Hub for Netflix

Walmart and Netflix are teaming up to sell merchandise pegged to the streaming media provider’s content.

“Through this new partnership, Walmart will not only offer products that bring the imagination of Netflix creators into reality, but Walmart customers and Netflix superfans will also find a new, exciting entertainment destination,” Walmart Executive Vice President Jeff Evans wrote in a news release Monday.

“The Netflix Hub brings together some of its most popular shows in its first digital storefront with a national retailer,” he added.

Merchandise will be tied to such shows as “Stranger Things,” “Nailed It!,” “CoComelon” and “Ada Twist, Scientist.”

Among the items offered when the Hub opens this fall are the Ada Twist Cuddle Plush ($10.97), “Squid Game” t-shirts, the “Stranger Things” Bluetooth cassette player ($64.88) and the Witcher Netflix Transformed Geralt Dark Horse Collectible Statue ($59.88).

Evans also noted the Hub will also offer a feature called Netflix Fan Select. It offers fans of Netflix shows an opportunity to vote for merchandise they’d like to see from the service’s stable of favorites.

Competing With Amazon

The new partnership will have benefits for both Walmart and Netflix.

Walmart wants to compete with Amazon, and part of that competition includes streaming services, maintained Ross Rubin, the principal analyst with Reticle Research, a consumer technology advisory firm in New York City.

“A partnership with Netflix could be used for further collaboration. Walmart might start offering select content from Netflix, for example,” he told the E-Commerce Times.

“There’s a lot of ways it could work without Walmart offering the full-blown Netflix service,” he added.

Zain Akbari, the equity analyst for Walmart at Morningstar, an investment research company in Chicago, noted that the partnership allows the retailer to capitalize on media-linked commerce without making the kind of investment Amazon made to do it.

Although Walmart sold its Vudu streaming service in 2020, its interest in interactive and shoppable media remains, he explained.

“From its standpoint a deal like this allows Walmart to focus on what it does best while leaving the content side of the equation to an established leading player,” Akbari told the E-Commerce Times. “Ultimately, it’s another avenue by which Walmart can expand its building e-commerce footprint.”

Good Business Move

“Allying itself with one of the two streaming market leaders — Netflix and YouTube both capture about six percent of total TV time — makes good business sense for Walmart,” added Charles King, the principal analyst at Pund-IT, a technology advisory firm in Hayward, Calif.

“The new storefront should please the company’s existing clients and attract new customers, and also provide a point of competitive differentiation from Amazon,” he told the E-Commerce Times.

Having exclusivity on products from Netflix’s hit shows is another benefit of its new partnership.

“Squid Game is a perfect example,” noted Michael Inouye, a principal analyst atABI Research.

“You can imagine what the opportunity would look like if this partnership was already in place and Walmart was the only place for official Squid Game Halloween costumes,” he told the E-Commerce Times.

He added that there is a lot of value but also a lot of cost in original programming, but to date, no one has done as well as Netflix with it.

“This allows Walmart to generate some of the same benefits to their core operations of an in-house streaming service without having to make those investments in original content,” he said.

Bricks and Mortar Prize

Netflix, too, benefits from the new arrangement.

“Walmart’s massive size and geographic reach make it a great partner for Netflix to reach shoppers,” King observed. “The new store should help drive sales during the upcoming holiday shopping season.”

“Netflix has tried for a while to monetize its content other ways. Selling merchandise is one of them,” added Morningstar Netflix equity analyst Neil Macker.

“Netflix is not an e-commerce company,” he continued. “It’s a streaming company. It has a different business model than a pure e-commerce company. By working with Walmart, they can get help with building a site, fulfillment, shipping and things like that.”

Netflix is also looking to diversify beyond subscriptions for its streaming service.

“It’s already announced its movement into games,” Rubin noted. “This is a way to take a page from Disney’s playbook.”

“Disney is very skilled at driving merchandise from characters in its franchises,” he continued. “Walmart offers a strong retail presence from which Netflix could potentially build that and realize more revenue from its original content and franchises.”

Netflix may also be looking beyond online involvement with Walmart.

“If Netflix could get into Walmart’s brick and mortar stores, that would be the bigger prize for Netflix,” he said. “To have a section of the stores promoting its properties would be a big win for Netflix.”

Crucial Channel

Inouye believes that in time, Walmart will become a crucial distribution channel for Netflix.

“Since many of Netflix’s shows are launched all at once — although there are a growing number that launch on a timed schedule — it can be extra challenging for Netflix to keep excitement up around a TV series when the next launch may be more than a year away,” he explained.

“Having merchandise and content to keep fans invested and engaged in this popular IP is massive for Netflix,” he said.

Creating original content can be a hit or miss proposition, he noted. Selling merchandise can help offset the cost of the misses.

Like Disney, Netflix would like to leverage its IP well beyond the video content itself, he maintained.

“Netflix is still in its early days here,” he said, “but it is starting to expand into new territories and opportunities and the Walmart deal could become a key piece to that strategy.”

“This is particularly critical in those markets, like North America, where future subscription growth is limited,” Inouye added.

“In these more mature markets revenue growth has to come from price increases or these alternate channels,” he continued. “The latter allows them to keep engagement higher, bring additional revenue, while ideally slowing the rate of subscription price hikes, which helps maintain — and slowly grow — the installed base.”

“Other content companies have looked to marketing and selling merchandise to bring additional revenue by capitalizing on hot IP — Rovio for example has done this with its “Angry Birds” IP — but with Netflix, this could be on another scale,” he concluded.

John P. Mello Jr. has been an ECT News Network reporter since 2003. His areas of focus include cybersecurity, IT issues, privacy, e-commerce, social media, artificial intelligence, big data and consumer electronics. He has written and edited for numerous publications, including the Boston Business Journal, the Boston Phoenix, Megapixel.Net and Government Security News. Email John.

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