The Nook HD+ tablet has not been a consumer favorite.

JUNE 26, 2013 • After posting a $118.6 million loss for the quarter ending April 30th, including a $18.3 million impairment charge on a 34% drop in sales of its tablet hardware, Barnes & Noble has made the decision to cease manufacturing its Nook Color devices. This follows a $133 million fourth-quarter write-down for unsold tablets, and a total $222 million write-down for the entire 2013 fiscal year. Unable to boost sales during the holidays, Barnes & Noble deeply discounted Nook Color hardware, as well as encouraging Nook HD+ purchases by throwing in a free Nook e-reader. In a financial conference call the retailer disclosed that its basic e-readers sell much more digital content than the more fully featured Nooks. As a result, Barnes & Noble will turn over manufacturing of the more expensive tablets to third-parties who will be extended co-branding opportunities. The dealer will still continue to develop and sell its own e-readers. In the meantime, Barnes & Noble will further discount its Nook Color tablets to clear inventory before the holidays.

Impact: As we noted a year ago when Barnes & Noble announced it would spin-off its Nook unit and accept a $300 million investment from Microsoft Corp., the company’s fully featured tablets had much to commend them but the hardware would require substantial investment to compete against Amazon’s dominant Kindle line. The bottom line is that Amazon’s e-book sales grew 70% last year while Barnes & Noble’s e-book revenue is showing single digit declines. While the company has lowered its exposure by selling 17.6% of its Nook unit to Microsoft, and another 5.4% to U.K. publisher Pearson, competing with Amazon will require many more millions of dollars than Barnes & Noble can afford to spend with revenue from it primary bookstore business falling 10% to $948 million during the last quarter. Another problem for the retailer is that consumers view Amazon’s Kindle Fire as an acceptable, in-expensive Android alternative to Apple’s iPad line. The high-end Nooks never attained that kind of status with consumers. Worse, the more expensive Nook hardware that does sell is not moving more digital content. Sticking with the sale of higher-end tablets is either pride or concern for its partners. Yet we do not see lowering cost exposure by offloading production as sufficient to save this hardware line given current consumer preferences. That is assuming forthcoming third-party hardware remains manifestly the same in scope and features to what is available now.

Could a smaller Surface tablet become the new Nook?

Then again, reports out of Taiwan indicate that Microsoft is in discussions with manufacturers there to support a smaller Surface tablet that could compete with the iPad Mini in the $299 range. It is not too far a stretch to see a version of this hardware running Windows RT available for sale in Barnes & Noble stores. Microsoft has the resources to take a long-view investment in premium digital book hardware in competition with Amazon and Apple that Barnes & Noble lacks. Additional synergies with the new Xbox One are also possible that could make such a hardware wager tempting. Whether such a gamble will be ultimately successful is a major question mark since Amazon is so dominant in digital sales it is hard to see the Nook business turning around. Regardless, we will be watching carefully to see what hardware ends up on shelves at Barnes & Noble this fall.