Chief Leaves Barnes & Noble After Losses on E-Readers

William Lynch Jr., the chief executive of Barnes & Noble, resigned on Monday, two weeks after a devastating earnings report that accentuated the bookseller’s losing battle against powerful rivals like Amazon.

Mr. Lynch’s departure was part of a series of sweeping changes the company announced as it tries to regain its footing after a failed initiative to build up its Nook division and compete in the increasingly crowded market for e-readers. When it revealed its fourth-quarter earnings late last month, Barnes & Noble said it would cease making its own color tablets, an acknowledgment that they were lagging popular brands like Amazon’s Kindle Fire and Apple’s iPad.

Instead, the company said it would form partnerships with third parties to make the color devices, while it continued to make and sell its own black-and-white versions of the Nook.

In a statement late Monday, the company said that Michael P. Huseby had been appointed chief executive of the Nook division and president of Barnes & Noble. Mr. Huseby has served as chief financial officer since joining Barnes & Noble in March 2012; previously he held that position at Cablevision Systems, a media company.

Max J. Roberts, the chief executive of the college division, will report to Mr. Huseby, while Mr. Huseby and Mitchell S. Klipper, the chief executive for the retail stores, will report to Leonard Riggio, the company’s chairman.

The moves on Monday appeared to be a step toward separating the digital and retail divisions, as the company has indicated it might do. Barnes & Noble has been in talks over a potential sale of its digital assets, as well as its 675 bookstores.

Microsoft is one potential buyer of the Nook business; last year it invested hundreds of millions of dollars to acquire 17.6 percent of the division.

Mr. Riggio has expressed interest in taking back ownership of the physical stores that make Barnes & Noble the largest bookstore chain in the country. Mary Ellen Keating, a spokeswoman for Barnes & Noble, declined to provide an update on that offer.

There was no indication that a new chief executive would be named.

“Because the company is in a transition period, we have no immediate plans to name a C.E.O.,” Ms. Keating said.  

 “We thank William Lynch for helping transform Barnes & Noble into a leading digital content provider and for leading in the development of our award-winning line of Nook products,” Mr. Riggio said in a statement issued Monday. “As the bookselling industry continues to undergo significant transformation, we believe that Michael, Mitchell and Max are the right executives to lead us into the future.”

The financial results for the fiscal fourth quarter underscored the urgency of the need to take action. The Nook unit showed a $177 million loss in earnings before interest, taxes, depreciation and amortization, or Ebitda, more than doubling the loss from the period a year earlier. Sales fell 34 percent, to $108 million.

The signs have been ominous for the company since the beginning of the year, when it announced that sales for the nine-week holiday period in late 2012 had declined at both its bookstores and in the Nook unit.

Mr. Lynch joined Barnes & Noble in February 2009, with no previous experience in bookselling. He was executive vice president for marketing at HSN.com and also worked for Gifts.com.

At the time, his arrival was hailed as a forward-thinking move, since Mr. Lynch, a Texas native, was only 39 years old and fluent in e-commerce and technology. Within months, Barnes & Noble introduced its first Nook e-reader.

To publishers, Mr. Lynch had performed a temporary miracle, helping create a product that provided a welcome competitor to Amazon’s Kindle, which dominated the market and offered e-books at a relatively inexpensive price.

The Nook was initially successful, drawing critical praise and capturing consumers who were uneasy about buying an e-reader — at the time a brand-new device — online, without testing it out in person. Barnes & Noble’s hundreds of retail stores allowed potential customers to see and touch what they were buying.

But even though Barnes & Noble quickly gained a sizable piece of the e-book market, it was not enough to ward off Amazon. And as black-and-white e-readers gave way to multifunctional color tablets, Barnes & Noble found itself competing unsuccessfully against companies many times its size, like Amazon and Apple, that have had technology in their DNA from the start.

As chief executive, Mr. Lynch worked from the company’s Ninth Avenue office in Manhattan, across town from the Fifth Avenue building where Mr. Riggio keeps his office. Mr. Lynch threw his energies into the digital side of the business, taking far less of an interest in the retail stores, and frequently flew to Palo Alto to build up Barnes & Noble’s presence in Silicon Valley, where their e-readers are designed.

Mike Shatzkin, the founder and chief executive of the Idea Logical Company, a publishing consultant, said a split of the business could help stave off the company’s decline.

“The Nook business clearly is going to need some global investment to have any kind of chance at all, and it certainly looks possible that they will be better off separate than together,” Mr. Shatzkin said. “There’s a glide path to oblivion, and you can affect the speed of the decline. Nobody’s going to bring back a robust brick-and-mortar book business.”

Barnes & Noble Weighs Its Nook Losses

Barnes & Noble, the nation’s largest book chain, warned that when it reports fiscal 2013 third-quarter results on Thursday, losses in its Nook Media division — which includes sales of e-books and devices — will be greater than the year before and that the unit’s revenue for all of fiscal 2013 would be far below projections it gave of $3 billion.

The problem was not so much the extent of the losses, but what the losses might signal: that the digital approach that Barnes & Noble has been heavily investing in as its future for the last several years has essentially run its course.

A person familiar with Barnes & Nobles’s strategy acknowledged that this quarter, which includes holiday sales, has caused executives to realize the company must move away from its program to engineer and build its own devices and focus more on licensing its content to other device makers.

“They are not completely getting out of the hardware business, but they are going to lean a lot more on the comprehensive digital catalog of content,” said this person, who asked not to be identified discussing corporate strategy.

On Thursday, the person said, the company will emphasize its commitment to intensify partnerships with other tablet producers like Microsoft and Samsung to make deals for content that it controls.

If Barnes & Noble does indeed pull back from building tablets, it would be a 180-degree shift for a company that as late as last year was promoting the Nook as its future. “Had we not launched devices and spent the money we invested in the Nook, investors and analysts would have said, ’Barnes & Noble is crazy, and they’re going to go away,’ ” William Lynch, the company’s chief executive, said in an interview last January.

Since 2009, when Barnes & Noble first decided to invest in building the device, its financial commitment to the division has been substantial. (The company does not disclose exact figures.) At the beginning of 2012, that bet seemed to be paying off and the digital future seemed hopeful.

In May, Microsoft decided to give a cash infusion to the product by pledging more than $600 million to Nook Media. In December, the British textbook publisher Pearson bought a 5 percent stake in the unit for nearly $90 million.

Going into the 2012 Christmas season, the Nook HD, Barnes & Noble’s entrant into the 7-inch and 9-inch tablet market, was winning rave reviews from technology critics who praised its high-quality screen. Editors at CNET called it “a fantastic tablet value” and David Pogue in The New York Times told readers choosing between the Nook HD and Kindle Fire that the Nook “is the one to get.”

But while tablet sales exploded over the Christmas season, Barnes & Noble was not a beneficiary. Buyers preferred Apple devices by a long mile but then went on to buy Samsung, Amazon and Google products before those of Barnes & Noble, according to market analysis by Forrester Research.

“In many ways it is a great product,” Sarah Rotman Epps, a senior analyst at Forrester, said of the Nook tablet. “It was a failure of brand, not product.

“The Barnes & Noble brand is just very small,” she added. “It has done a great job at engaging its existing customers but failed to expand their footprint beyond that.”

Others pointed out that even if the Nook itself was a nice device, its offerings were not as rich as that of its rivals. Shaw Wu, a senior analyst at Sterne Agee, a midsize investment bank in San Francisco, said, “It is a very tough space. It is highly competitive, and extras like the depth of apps are very important. But it requires funding and a lot of attention, and Barnes & Noble is competing against companies like Apple and Google, which literally have unlimited resources.”

Horace Dediu, an independent analyst based in Finland who focuses on the mobile industry, said that the difference in quality among the products was so small as to be increasingly irrelevant.

“We’ve moved beyond a game of specs,” he said. “Now it is about your business model, about distribution and economics of scale.”

He said that while the cellphone business used to have numerous competitors, it now has only two companies that are really profitable: Apple and Samsung. He said he expected a similar consolidation in the tablet market, with companies like Barnes & Noble “maybe falling off the map.”

There is no immediate danger to the book retailer, which has some 677 stores nationwide. The company has said it plans to close about 15 unprofitable stores a year and replace them at a much slower rate. It also still holds roughly one quarter of the digital sales of books and more of magazines.

Still, the threat is large enough that Barnes & Noble executives are working hard to determine a strategy that focuses on core strengths like content distribution. Its content is its “crown jewel,” said the person familiar with the company’s strategy, “and where the profitable income stream lies.”

Sony, Sharp and Panasonic Report Significant Losses

In the most dire warning, Sharp forecast on Thursday a 450 billion yen ($5.6 billion) full-year loss and warned that it had “material doubts” about its ability to survive.

On the same day, Panasonic’s shares lost a fifth of their value in Tokyo after the company forecast a 765 billion yen ($9.6 billion) annual net loss from write-downs in its solar-power, battery and mobile handset businesses.

And Sony, perhaps the best positioned of the companies, posted a net loss of 15.5 billion yen ($194 million) for the quarter on Thursday and warned of falling sales in almost every product it sells.

“We have a lot of great technology which we want to tap to revive and generate profit, but the company does not have that vitality,” Takashi Okuda, Sharp’s chief executive, told reporters after the company posted a net loss of 249 billion yen ($3.1 billion) for the three months to September. The loss was far larger than expected.

In a statement, the company said it had a “serious negative operating cash flow” which raised “serious doubts” about its ability to continue as a going concern, and said it was taking steps, including pay cuts, voluntary redundancies and asset sales, to generate cash flow.

While Sharp is in the most serious trouble, the three companies’ woes are similar at the core.

All three make good quality, even cutting-edge products — but so do their overseas competitors, usually at lower prices. None of the three have managed to generate the brand pizazz of Apple, or the marketing muscle of Samsung Electronics. In addition, a stubbornly strong yen continues to sap their competitiveness, while Japan’s territorial dispute with China has hurt sales there.

The scale of the losses is the result of specific missteps, from huge investments in the wrong technologies to a reluctance to exit loss-making businesses. A manufacturing bubble here in the mid-2000s — fed partly by an unusually weak currency and Americans flush with cash from rising home prices — masked continued weaknesses in their business models and spurred the companies to take big bets that backfired.

When the global financial crisis brought that boom to an end in 2008, the three were saddled with excess capacity, bloated work forces and investments that they could hardly hope to recoup. And their refusal to make a big enough departure from the ways of their glory years is now making a comeback difficult.

“Many investors are longing for reforms that will let all of the pus out,” Yuji Fujimori, technology analyst at Barclays Capital in Tokyo, said in a recent note to clients.

Sharp’s stumble, in many ways, has been the most humbling. It was the biggest beneficiary of the manufacturing bubble: from 2000 to 2007, its profits jumped 150 percent. Sharp’s high-end Aquos liquid-crystal display televisions — which it manufactured at state-of-the-art factories in Kameyama, in western Japan — were a runaway hit in the nascent flat-panel market. The spinoff Aquos cellphone topped Japanese sales rankings. Sharp’s solar batteries also sold briskly, helped by a bubble in green technologies.

The company’s success during this period seemed to validate Japan’s penchant for manufacturing their most important products in-house. In advertisements, Sharp showed off its cutting-edge factories.

But even before the financial crisis, analysts were warning of an impending crash in prices of flat-panel televisions, which were fast becoming commodities that cheap upstarts could emulate. In 2008, the iPhone made its debut in Japan, the end of an era for Japanese-style cellphones. Chinese upstarts were starting to flood global markets with cheap solar panels and batteries. In consumer electronics, outsourced manufacturing became the norm.

Still, Sharp did not change course. It built a new factory in Sakai, Japan, which could make 6 million large LCD panels a year — more than the size of the global market at the time. Sharp missed the smartphone wave, and its cellphone sales in Japan halved from 2007 to 2012. And in late 2011, the solar bubble burst, driving many solar power companies into bankruptcy and Sharp’s solar batteries business into the red. The unit has not turned a profit since.

Now, the Kameyama factories no longer make televisions but panels for Apple’s iPhones and iPads.

Panasonic, for its part, also bet heavily on plasma televisions in 2003, pouring some 600 billion yen into a series of factories in Amagasaki, not far from Sharp’s own plant. It also bet on solar panels and rechargeable batteries, buying Sanyo in 2009.

But with plasma now a fading technology and solar power struggling, Panasonic is saddled with major losses. Last year, it announced that a factory in Amagasaki was closing, less than two years after it opened.

Kazuhiro Tsuga, who took the helm at Panasonic this year, was blunt in describing his company’s predicament. “We are among the losers in consumer electronics," he told a news conference on Wednesday. He now promises to shift the company away from money-losing televisions and gadgets.

Of the three, Sony now seems the most prescient. Its executives have preached the power of networks and content since the 1990s, building up a vast catalog of music and movies to lure users to their devices. Sony has also moved to slash costs and jobs and sell off some unprofitable businesses, refocusing the company on digital cameras and imaging technology, video games and mobile devices. This quarter, the sale of its chemical products business, which made materials for LCDs and optical discs, helped alleviate losses. Sony is now making a push into the medical field with an investment in the endoscope maker Olympus.

Internal squabbling has quashed its efforts to marry its hardware and software, however, and it refuses to abandon one of its biggest money-losers, its television business, which has bled red ink for eight consecutive years.

“We intend to hunker down and build a profitable business,” Masaru Kato, Sony’s chief financial officer, told a news conference Thursday. “And where we can, we will chase new markets.”