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Well, we've seen the new nook tablet and, apparently, the market likes it.

In an earlier post I made some predictions about what the new nook might be-  so far I'm only 1/3 on them.  The company did announce a European expansion- although it won't be until next year.   Still waiting on news about some synergy with former spinoff Gamestop.  Mirasol is still MIA and may be vaporware for another year.

What we did see, was a $250 tablet with slightly more power and storage than the Kindle Fire.  This doesn't really sound that impressive.  So why the rally? 

Do people actually think a product $50 more than the competition will somehow improve their market share?

While I would certainly attribute the relative stock performance to the extreme valuation difference between the two companies more than anything else- I do see one very real scenario in which Barnes and Noble may counterintuitively gain market share in the ereader market simply because they charging more.  It has nothing to do with consumer demand and everything to do with cash flow and supply capacity.

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Amazon is clearly employing a razor-and-blade model, losing money on the hardware in order to sell more ebooks, apps, and whatnot.  There have been several estimates about exactly how much money Amazon is losing on each tablet, but the price of the nook tablet gives credibility to the Piper Jaffray estimate of $50.  For the sake of this analysis, let's assume that this is correct.

Amazon defenders will be quick to point out that they will make the money back- and that is very likely to happen- eventually.  The catch is that the ebook and app sales will not occur until AFTER the Fire has been shipped to, opened and used by the customer for some length of time- while the hardware loss occurs at the initial sale of the tablet.  In the interim, Amazon must borrow $50 in cash flow from elsewhere in the company if they want to replenish the inventory level and continue selling units.  At some point, Amazon may have so much cash tied up that they must simply bow out of the market for a while until downloads catch up to the hardware sales.  In many if not most cases, this interim cash tie-up is likely to be longer than the holiday season itself since noone is using a Kindle still wrapped up under the tree.

The Barnes and Noble Nook, however, is selling at a break-even point.  They aren't making money, but they aren't tieing it up, either.  After each nook sales clears, they simply take the $250 from the sale and use it to order another unit from suppliers.  Thus, they should be able to continue supplying units until demand is met.

Now, given that Amazon can probably expect several billion in cash flow from operations this Christmas season, they probably aren't expecting this to be a problem.  They believe the demand level will falter around 5-7 million units,  tieing up only 250 to 350 million in cash. which they should be able to swing.  But what if they underestimated demand?

If people really want to order 20 million budget tablets this holiday season, for example, Amazon would need to set aside a full billion dollars in cash while waiting out the subsidy.  Given that Amazon is also expending cash to build fulfillment centers and purchase more servers for AWS, that just might not be in the budget this year.

If the demand is much larger than Amazon can supply, Barnes and Noble may simply be in a better position to ramp up quickly and steal the excess market share.  Even if the nook product itself is less desired by consumers.

And please note that none of this has anything to do with the Ipad.  That's simply a different market.

 

 

 

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