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January 29, 2013 10:11 pm

Barnes & Noble’s Nook looks to textbooks, sources say

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Nook Media should be able to attract more funding and partnerships if it demonstrates success in the education publishing market, said two sources familiar with the matter.

To tap this opportunity, Nook plans to launch a proprietary education software platform in 2013, the first source said. Nook hopes this interactive platform will become a leader in the distribution of electronic textbooks, he said.

Barnes & Noble’s (NYSE:BKS) e-reader and college bookstore subsidiary has faced fierce competition from Amazon.com (NASDAQ:AMZN) and Apple’s (NASDAQ:AAPL) consumer tablets as the bookseller tries to develop a digital business. Nook holiday sales declined 12.6% last year compared to 2011 even though it launched new HD e-readers.

Over the past year, New York-based Barnes & Noble has lined up investments from Microsoft (NYSE:MSFT) and Pearson (NYSE:PSO) to support development of the Nook business. The Redmond, Washington-based software giant agreed in April to invest USD 300m in Nook in exchange for a 17.6% equity stake in the business. Pearson paid USD 89.5m for a 5% stake in late December.

The Pearson investment is the first of what could be several partnerships between Nook and educational publishers, said a person close to Barnes & Noble. UK-based Pearson is the parent of this news service.

The first source said the US textbook market is around USD 14bn and Pearson has the largest market share with around a 40% stake. Macmillan-McGraw Hill (NYSE:MHP), John Wiley & Sons (NYSE:JW.A), and Cengage Learning are other large textbook publishers.

By developing a digital distribution platform, Barnes & Noble will be addressing one of the major conundrums of the education publishing market, said an industry banker, explaining that the industry “desperately” needs to have applications written specifically for the market.

If Nook and its partners can write apps for the device, it may be able to find an area of strength to compete against Apple’s iPad, said the second source.

The first source said Nook would likely launch other projects with Microsoft. Microsoft has no plans to increase its investment or take a more active role in the business unit, the second source said.

Over time, an important factor in a Barnes & Noble turnaround will be product tweaks that engage more consumers, the second source said. Ultimately, Nook’s investors are looking for the company to produce a device that spans uses from school to leisure, he said.

For fiscal 2013, Barnes & Noble is forecasting Nook Media to deliver around USD 3bn in revenue and an EBITDA loss comparable to 2012.

The Wall Street Journal reported on Monday that Barnes & Noble may close a third of its retail stores over the next 10 years. This news service has previously reported the company should consider selling or spinning off the business.

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