Why hardware startups should pay attention to the Nook's decline

By Sarah Lacy , written on January 3, 2013

From The News Desk

Back in 2009, I was traveling in Shenzhen, China for my book on international entrepreneurs. Despite warnings I got in Beijing that hoodlums in Shenzhen made a practice of riding up onto the sidewalk on mopeds and breaking tourists' legs before robbing them, it was a place I had to see.

Shenzhen is the home of where nearly everything tech is produced (and ripped off). The very hub of how Chinese manufacturing had permanently altered what we got to play with, how much it costs, and how quickly new devices could be rolled out to land in our hot little hands. The core of Shenzhen looked like Times Square at night, only it was that bright during the day. Signs didn't rely on neon. This was the home of LED production, after all.

In touring one factory, I noticed a word embossed on polished steel in all lowercase: nook.

Sadly, I had no idea I was looking at a huge potential scoop: The name of the much anticipated ereader that Barnes & Noble was launching was an ambitious "Take back the night!" gambit to reclaim its industry from Amazon's burn-and-pillage clutches.

Today, the Wall Street Journal and others report that -- along with overall slumping sales of ereaders -- Nooks are on the decline. Barnes & Noble reported that revenue at stores fell 10.9 percent during the holiday season. That's not just due to fewer stores existing. There was an 8.2 percent drop in sales at stores open for at least a year. And most of that was due to lower sales of the Nook. Excluding the Nook, same-store sales were still down, but just by 3.1 percent.

It seems one of the boldest experiments in brick and mortar stores fighting back the digital age (by joining it) has failed. And with it, it's taken one of the most stunning examples of how Chinese supply chain innovation could seemingly make anyone a tech company.

As I saw firsthand, China's manufacturing success has way more going for it than just cheap labor, which, by the way, is getting so expensive that Mexico, Southeast Asia, and even parts of the US are getting competitive once again. China's real manufacturing skill is an almost incomprehensible speed and scale with which materials, labor, supply chains, packaging, and logistics can be assembled in huge volumes on the fly, and in ways previously unheard of before.

The Nook was a powerful example of that. It took Barnes & Noble, a company that known for paper and bricks and mortar, just six months to create a pretty good ereader which competed handily on features with most other ereaders and tablets. It was something it had taken former gadget king Sony six years to pull off. That wouldn't have been possible without modern China.

But as it turned out, just creating a great device, putting it in a huge national chain, and aggressively marketing it on TV wasn't enough. Despite all efforts, the feature that the Nook could never compete on was the most elusive: "Cool." The power of China, a huge marketing budget, and even Jane Lynch couldn't help.

Brand matters. And while the Nook impressively kept up with tablet specs as the market moved from just ereaders, its brand made little sense next to Apple. Buying a device at Barnes & Noble was already counter-intuitive enough. Buying one that wasn't really tied to reading was likely a stretch too far, particularly amid a slugfest with Apple and Amazon.

As the tech world descends on Vegas next week for the annual Consumer Electronics Show, it's being called by some the year of the gadget startup. Indeed, I've long championed companies like Nest, Jawbone, Square, and Fitbit for bringing back hardware innovation to the Valley at a time when large companies not named Apple are mostly just ripping one another off.

But let the Nook be a lesson to those who think flexible supply chains, cheaper and quicker manufacturing, and Kickstarter have lowered all of the hardware barriers to entry: Getting consumers to love and adopt a new device is still just as hard as it ever was.