Targets missed, Nook sells stake to Pearson to secure book distribution

Talk about vertical integration. Pearson is taking a five percent stake in newly-reconfigured ebook device and retail brand Nook Media in order to gain favourable distribution for its education books.

Its $89.5 million investment values Nook Media at $1.789 billion, the same as when Barnes & Noble span the digital book outfit out in to a separate company in October.

But its comes on the same day Barnes & Noble told Wall Street its holiday sales, announced on January 3, results “will be below expectations and that the Nook business will not meet the company’s prior projection for fiscal year 2013”.

When Barnes & Noble span out Nook, Microsoft invested $300 million for a 17.6 percent stake. Pearson’s announcement today, however, puts Microsoft’s stake at a reduced 16.8 percent. Barnes & Noble’s stake is put at 78.2 percent (down from 82.4 percent).

That is because new equity was issued. Pearson, whose John Fallon (pictured) becomes CEO on January 1, has a further option to buy another five percent later on.

Why is Pearson putting up the money? Its North America CEO Will Ethridge (via announcement) says:

“With this investment, we have entered into a commercial agreement with Nook Media that will allow our two companies to work closely together in order to create a more seamless and effective experience for students. It is another example of our strategy of making our content and services broadly available to students and faculty through a wide range of distribution partners.”

Barnes & Noble says (via announcement):

“Pearson’s strategic investment in Nook Media will accelerate customer access to digital content by pairing its leading expertise in online learning with Nook Media’s expertise in online distribution and customer service. This will facilitate improved discovery of available digital content and services, as well as seamless access.”

Separately, Barnes & Noble adds: “Nook Media and Pearson will be also entering into a commercial agreement with respect to distributing Pearson content.”

In other words, it’s a classic vertical integration play — for the digital age. By owning both content production and a part of retail distribution, Pearson can begin to become more certain about selling its wares — at a time when publishers, in the consumer space, have been pit against all-powerful retailers like Apple and Amazon.

Pearson has previously conceded its printed text book business is challenged, whilst its Penguin book publisher saw ebook sales grew 33 percent during 2012.

However, Pearson’s investment is not solely about digital content. Its announcement notes that Nook Media now also operates Barnes & Noble’s network of 674 booksellers at US college campuses — giving it continuing certainty over the delivery of those printed education books.

For Nook, guaranteeing content supply in the increasingly important education sector could prove positive.