Wal-Mart is reportedly mulling a purchase of Nook from Barnes and Nobles as the Bentonville-based retailer continues to explore ways to expand its footprint and service offerings against Amazon.
Wal-Mart Stores in recent years has recruited some of the brightest talent in Silicon Valley with a dozen tech acquisitions since 2011. But the retail behemoth has yet to put its name on a hardware device or ebook service to date. TheDeal.com recently reported that WalmartLabs is considering a purchase of Nook from Barnes and Noble which is looking to stem losses and appease investors.
Sean deLone, an analyst with Seeking Alpha, noted in his Dec. 16 blog that “Nook is a cheap way for Wal-Mart to enter the content and E-Reader industry, hoping to break up Amazon’s monopoly on lucrative E-book sales.” He said the rumor that Wal-Mart could buy the beleaguered Nook division from Barnes & Noble is a clear indication that Wal-Mart intends to heat up the retail rivalry with Amazon.
“You need go no further than Wal-Mart's own book section on their website to understand their motivation for acquiring Nook. Prominently featured at the top of the page is a banner ad for "Great Gifts" promoted by the “Hatchette Book Group."
Hachette is the publisher that had a very public fight with Amazon during the past year over E-Book pricing.
Wal-Mart has not publicly commented on a desire to purchase the Nook business, but the retailer continues to invest heavily in its technology arm with earmarked funds expected to range between $1.2 billion and $1.5 billion in fiscal year 2016, up from approximately $1 billion, estimated for this year.
“Wal-Mart hates other retail monopolies, watching their most formidable competitor, Amazon, hold 60% market share in E-Books must be agonizing,” deLone said.
He said a case could be made for Wal-Mart to buy the Nook business based on the most obvious strategic motivation — to take online traffic and market share away from Amazon. He adds that besides being a lucrative business, E-Books and the Kindle also support the other functions of Amazon's business. They drive traffic for other items, help Amazon develop technologies, and work as a vehicle to uphold Amazon's reputation for outstanding customer service. He notes that Wal-Mart would benefit from that as well if it owned the Nook business.
The second reason Wal-Mart may be considering Nook is because of the profitability of digital book sales.
“Platforms like Amazon's E-Book store or Apple's ITunes can essentially print money, once they are scaled, and even bully content producers to raise prices,” deLone notes.
He warned that the barrier to entry is the ultra-capital-intensive and competitive device business, which has produced huge losses for Amazon outside of the Kindle. He said Apple is an anomaly that no other device company can hope to replicate. To illustrate, Barnes and Noble's content sales (E-Books) rose by 16.2% in 2013 even though hardware sales declined 16.4%.
“It remains to be seen whether or not Wal-Mart has the savvy or wherewithal to break into this industry,” deLone said. “If Wal-Mart truly likes Nook's business and cannot resist getting into the hardware and content businesses, then this would be an opportunistic time to get in cheaply.”
Carol Spieckerman CEO of newmarketbuilders, said the potential for Wal-Mart to acquire the Nook business is “fascinating and if executed, it would represent another future-focused move from the retail giant.”
Spieckerman said hardware is enjoying a bit of a heyday in retail right now because devices like readers, smart phones, media boxes and scanners are all potential gateways to retailers’ content, service and product ecosystems.
“That’s why Amazon has continued to launch these types of devices, with little concern about the profitability of the devices themselves. It’s why Dell is doubling down on its low-margin PC business even as others run away from the category in droves. PCs are a pathway to its higher-margin service offerings. Although it’s easy to think of the Nook as merely a family of devices, the opportunity in play is all of Nook Media which also includes its online bookstore, e-content publishing and college business, all of which would integrate nicely with Wal-Mart’s platform and power up its content marketing aspirations and digital entertainment portfolio,” Spieckerman said.
While Barnes and Noble hasn’t been able to make the most of these assets because of its narrow focus and dwindling customer base, Spieckerman said Wal-Mart could better integrate the Nook business into its platform. She said Walmart has no trouble assimilating multiple technology acquisitions over a relatively short period of time.
“WalmartLabs and the Global Ecommerce teams would be great stewards of the Nook ecosystem. Certainly Wal-Mart is more prepared than most to take it on,” Spieckerman said.