Can Microsoft Save Cursed Barnes & Noble? No

Microsoft’s (NASDAQ: MSFT) decision to invest in the e-commerce arm of Barnes & Noble (NYSE: BKS) will do nearly nothing for the bricks-and-mortar book company. The challenge the two companies face has little to do with the failure of the Windows Mobile OS or Microsoft’s inability to salvage Nokia (NYSE: NOK), which was once the largest handset firm in the world. Barnes & Noble’s problem is that its Nook e-reader runs a distant second to the Amazon.com (NASDAQ: AMZN) Kindle. Also that the Barnes & Noble brand reputation is in ruin.

The impressiveness of Microsoft’s investment cannot be overvalued. The first tranche of capital is $300 million. Redmond also has pledged $180 million over three years in guaranteed revenue-sharing payments for Barnes & Noble e-book sales. In addition, Microsoft has committed to invest $125 million over five years to add funds for international expansion.

But Barnes & Noble has been mentioned too often in the same breath as Borders, which failed, Circuit City, which is gone, and deeply troubled Best Buy (NYSE: BBY). As with Borders, outside investors have attempted to break Barnes & Noble into pieces or force it to return money to shareholders. These institutions have picked over the company’s carcass like vultures. The attacks have been front page news, as has been Barnes & Noble’s efforts to deal with the evaporation of physical book sales.

Barnes & Noble does not have a single advantage over much larger rival Amazon.com. An investment of $300 million is far too small to change its position. The Barnes & Noble Nook has 27% of the U.S. e-reader market to Amazon’s 60%. Those numbers neglect to include Apple (NASDAQ: AAPL), even though its iPad dominates the tablet PC market, which has products that are too close to e-readers for Barnes & Noble’s comfort. To make matters worse, a good deal of evidence indicates that Kindle sales have growth faster than Nook sales recently. That may be helped by the power of the Amazon brand and the massive traffic to its main website. Comscore reported that in March the Amazon sites were the seventh most visited in the United States, with more than 106 million unique visitors. No other e-commerce company came close.

Barnes & Noble lost whatever brand power it had several years ago as it moved into the e-reader business late and analysts said the tardiness doomed it. The company is still considered a store retailer, which is a curse to both customers and investors. It is a curse the company can no longer overcome.

Douglas A. McIntyre