Can the Nook Find Its Niche?

Barnes & Noble released a new Nook Tablet Tuesday, shaving US$50 off the price and reducing the storage by half. The new price, $199, matches Amazon’s Kindle Fire. The new Nook emulates the Fire on a number of fronts — price and 8 GB storage. The new Nook comes with a 1 GHz dual-core processor and a slot for a microSD card that will hold up to 32 GB.

B&N also dropped the price of its Nook Color e-reader $30 to $169.

Amazon heated up the tablet market last fall when it introduce the Kindle Fire at a price that many consider a loss-leader, counting on content sales to drive profit. B&N needs some fire of its own now.

The company reported third-quarter earnings on Tuesday, the same day the Nook Tablet was released. Although revenue grew 5 percent, profit dropped 14 percent. B&am;N expects Nook business to generate $1.5 billion in sales over the coming year.

Compared to Kindle Fire

With a price of $199, it’s pretty clear B&N is looking for a piece of the action Amazon has stirred in the past few months. As for hardware and software, the new Nook appears more like the Fire than it does any of the other tablet contenders.

“It does look like B&N made a strong effort to match the Fire’s specs,” Neil Mawston, director of global wireless practice at Strategy Analytics, told the E-Commerce Times. “The 8 GB’s price drop from $249 to $199 is the strongest indication.”

The Nook also maintains the 7-inch form factor, he noted.

“B&N is keeping its newest offering in the lower end of the tablet market,” said Mawston. “They’re basically staying away from competing with Apple.”

B&N will have a hard time reaching the high bar Amazon set, however.

“The new Nook Tablet compares reasonably well with Amazon’s Fire in terms of hardware, but it is still lagging in terms of the content ecosystem,” Stephanie Ethier, senior analyst at In-Stat, told the E-Commerce Times. “Amazon’s offering of digital and physical goods is deeper and broader than Nook’s offering.”

Selling at a Loss?

One of the striking aspects of the Fire is that it seems to be selling at a loss, presumably to drive content purchases. Teardowns of the Fire indicate the components alone can total $199. The Nook may be a tad different.

“B&N is likely to be self-subsidizing the Nook less than Amazon is self-subsidizing the Fire,” said Mawston.

B&N can’t afford as large a subsidy, in his view. “Amazon’s pockets are deeper, and its financial health is relatively strong.”

The more expensive version of the Nook was self-supporting, B&N noted, but the new version could be a different story.

“In the earnings call, there was reference to the original tablet now being gross-margin positive. This message was not repeated about the new $199 model,” Peter King, director of tablet and touchscreen strategies at Strategy Analytics, told the E-Commerce Times. “This leads us to suspect that for now, at least, the model is being subsidized in order to gain revenue from content further down the line.”

Is self-subsidy an effective business model? It may depend on what you have to sell. A potential Nook spinoff may also be part of the equation.

“If you are trying to create a short-term valuation of the Nook business, it would be beneficial to show a high uptake of devices, and a lower ASP would enable that,” said King. “However, on the downside, reporting relatively short-term figures of content sales would be negative. Overall, it is not an unusual business model for those that have a device and content ecosystem.”

Who Needs the Nook?

So who needs the Nook? Why would someone buy the Nook when the Fire, with a larger ecosystem, comes at the same price?

“We believe the initial target audience for the Nook Tablet will be middle-income males and females aged 30 to 65 living in urban and suburban areas,” said Mawston. “Yet the Nook tablet will be competing in an increasingly crowded market.”

B&N will need to shout very loud to get itself heard above the noise of Amazon and others, Mawston said.

Ultimately, consumers will likely shop content, since the Nook and the Fire are similar in price and function, and in that contest, B&N will have to work hard to win the sale.

“The cold truth is that B&N doesn’t have the strong content offering that Amazon has,” said Ethier.

Kindle Fire owners are able to access far more than books on their devices, she noted.

“Amazon offers a stronger ecosystem,” said In-Stat’s Ethier. “B&N has a publishing library, but in the end, I still think the Color Nook lineup is aimed at avid readers who want color, despite the fact that it’s positioned as a tablet.”