B&N reduced prices fairly drastically for Father’s Day, discounting its Nook tablets between $70 and $129. That was a big drop for a week-long promotion. But B&N said Monday that the slashed prices are sticking around for … well, at least for awhile, with no end date given, though it’s apparently still “limited-time pricing.”

So the 7-inch Nook HD tablet now starts at $129, down from $199, and the 9-inch Nook HD+ tablet now starts at $149, down from $269. The devices were both launched less than a year ago.

Nook Media President Jamie Iannone said this is to “help our customers gear up for a great summer reading season … We’re thrilled to keep in place our best prices ever and deliver great value to make reading more affordable.” But it’s not a great sign for the health of the Nook tablet business: If customers were snapping up these tablets, B&N wouldn’t have to slash their prices. To be sure, the 7-inch tablet market is crowded, but Amazon’s most basic 7-inch Kindle Fire is still $159 with ads and $174 without, while Google’s Nexus 7 starts at $199 (for 16 GB; the Kindle Fire and Nook HD start at 8 GB). The iPad Mini, meanwhile, starts at $329.

Plus, combine the price cuts with the multiple rumors that Barnes & Noble plans to phase out the Nook tablet line by the end of fiscal year 2014 (which would be a year from now) and it starts to look as if B&N is trying to clear out stock. (The company has already phased out the lower-end Nook Tablet and Nook Color.) We may get more answers from the company’s next earnings report, which comes out June 25.

Most estimates had placed Apple’s U.S. ebook market share at around 10 percent, with Amazon’s Kindle at 50 to 60 percent and Barnes & Noble’s Nook at 25 percent. But Moerer said the iBookstore’s market share was 20 percent in the first few months after the iBookstore’s launch, Publishers Weekly reports,  and is about 20 percent now. (If this is true, the other retailers’ market shares would need to be adjusted downward, since Google and Kobo likely hold 1 to 2 percent of the U.S. ebook market.) From PW:

“The government called the iBookstore ‘a failure,’ and charged that ‘Apple pricing was unfair to consumers,’ and that ‘Apple sold fewer books because of the higher price caps.’ Moerer challenged that characterization, ‘I disagree. Ebook sales grew 100 percent last year at the iBookstore and it had over 100 million customers.’ The government countered that ‘when you drop prices you sell more books,’ and Moerer said, ‘sometimes, yes.’”

In addition, Moerer said that Apple has not enforced the most favored nation (MFN) clause for ebooks since last year. And Publishers Marketplace reports that “from the beginning Apple enforced the MFN manually rather than in a fully-automated fashion, with employees checking prices one-by-one against other retailers. Thus they ‘tended to focus on the best sellers.’”

Macmillan CEO John Sargent also completed his testimony on Tuesday. Hachette CEO David Young takes the stand Wednesday, and will be followed by the government’s expert witnesses.

Apple SVP Eddy Cue is testifying on Thursday. The Financial Times profiles Cue and describes his role in the case here.

Users will be able to purchase and read books directly from the Mac app. (There are now 1.8 million titles in the iBookstore, Apple said, up from 1.5 million in October 2012.) The app could be particularly useful for students, who could have a textbook open on their computer while they take notes.

Amazon has Kindle reading apps for PC and Mac, though you can’t purchase ebooks through the apps. Nook has a Windows 8 app that allows purchasing and reading, but doesn’t have a Mac app.

Publishers Lunch points out that much of the financial analysis in the report of the proposed buyout is inaccurate: Among other things, while the report says a $1 billion purchase price is “well below the price it had originally bought in at,” Publishers Lunch notes that because of the way the original investment was structured, this price would actually represent a small premium. Nonetheless, if the documents are legit (the NYT says they are, but appear to be a few weeks old), it’s worth thinking about what Microsoft wants with the Nook business. Barnes & Noble shares were up 23 percent in pre-market trading this morning.

A reading ecosystem for Windows 8

It’s not surprising that Microsoft reportedly has no interest in Barnes & Noble’s tablets, which have never taken off. In fact, as of last week, the Nook HD and HD+ incorporate a full host of Google services, including Google Play, Gmail and the Chrome browser. While B&N has claimed it is committed to the Android platform and to the tablet business overall, Microsoft obviously has no incentive to keep a line of poorly performing Android tablets up and running.

What Microsoft does need is a reading ecosystem for its Surface tablets and other Windows 8 devices. That’s why the company bought a stake in Nook in the first place, but so far it hasn’t resulted in much more than a Nook app for Windows 8 (released after Amazon launched its own Kindle for Windows 8 app). With full control over the Nook ecosystem, Microsoft can take advantage of some of the technology — including book discovery and “scrapbooking” features — that Barnes & Noble has built for these devices without being dragged down by the devices themselves. It would also presumably get access to Nook’s ebook publisher relationships, which lie with Nook Media, not with Barnes & Noble.

A pre-existing customer base to compete against Amazon and Apple

The buyout could also help Microsoft compete against Amazon and Apple. Kindle is still the leading e-reading platform, and Apple’s share of the e-reading market is small, but growing, especially when it comes to heavily illustrated and interactive titles. While there is no guarantee that Microsoft can become a leader in e-reading, it has a better chance of doing so if it harnesses an existing platform and customer base and then extends it to Windows users worldwide, rather than attempting to build a system from scratch.

A caveat is that Nook hasn’t managed to grow its market share against Kindle. It’s been stuck around 25 percent since 2011. But that’s better than the zero that Microsoft has now. “They can afford it as a bet, even if it is a long shot,” Peter McCarthy, the founder of book publishing consultancy McCarthy Digital, told me. “Microsoft is awful with content and know it. They’re  always looking for another Xbox, though.”

Merkoski ran technology departments for a number of companies and headed e-commerce initiatives at Motorola before joining Amazon as a technology manager in 2005. For the next five years, he served at the company in a number of Kindle-related roles, helping to launch the first two Kindle models and the Kindle DX. “I first joined a team that built the electronic books for Kindle, but I went on from there to do it all,” he writes. “I invented some of the technology used in ebooks and launched the first few Kindles. I’ve traveled to book fairs in New York and London and Frankfurt to evangelize ebooks. I’ve watched ebooks being made in the Philippines and supervised the assembly of Kindles in China. I’ve talked to the White House, former presidents, and astronauts about ebooks.”

I found Burning the Page the most interesting when Merkoski discusses his experience at Amazon, working directly for CEO Jeff Bezos. “I worked in a modern version of Gutenberg’s workshop,” he wrote. But he can’t share much:

• “I believe Jeff [Bezos] wanted Kindle to be his legacy to history. He wanted it to succeed.”
• “The Kindle organization was in some ways a startup within Amazon and benefited from Jeff Bezos’s venture capital infusions, long-range vision, and full support.”
• “Jeff originally wanted the Kindle code names to come from Star Trek, since he’s such a Trekkie, but more literate minds prevailed.”

While Merkoski describes himself as “the closest there was to an ebook shaman, a tribal elder who could talk to all the people who joined Amazon after me about the early days of Kindle, provide the inside scoop,” he doesn’t (and may be legally unable to) provide any inside scoops in this book. So the next best thing is when he can speak specifically about e-reading platforms — including the advantages of Amazon’s competitors. The development of the Kindle was highly secretive: “No outsiders had seen the Kindle because it was created in a perfect vacuum from the very beginning,” Merkoski writes. That resulted, in 2007, in a $399 device that sold out in five and a half hours, remained out of stock for months and got a lot of mixed reviews (facts that Merkoski doesn’t mention).

Kindle’s flaws — and what competitors did better

Future versions of the Kindle improved on some flaws: Merkoski calls the Kindle 2, introduced in 2009, “truly an incredible device.” But “in fits of wakefulness, I thought about how Kindle lacked nuance, style, fonts, and things like multimedia…Kindle’s success made new ideas paradoxically difficult, as if everyone was walking around on stiletto heels on a glass floor, careful not to run, not wanting to take the wrong risks.”

Kindle competitors, he says, have done better in lots of ways. Take Barnes & Noble: “Out of all the retailers who sell dedicated e-readers, they’re the most innovative. They’re the first to release new book-reading features and to innovate on the hardware side. They were the first to have touch-sensitive e-ink screens…They totally get the social experience of books in the way that it crosses over from the real world to the digital. They can innovate so fast because they’re not burdened with their own R&D group.” Likewise, “companies with more humanistic sensibilities than Amazon will win the e-reader war by making the experience more human, more playful…let’s face it: there’s still something emotionally bereft about a Nook or a Kindle.” The winner on that front, he says, is Apple’s iPad.

Ultimately, Merkoski believes, “Amazon is winning the ebook revolution, but it may lose the war…Competitors like Barnes & Noble and Apple have successfully blurred the lines and proven that they can provide a great media experience, so Amazon’s brand matters less in the eyes of readers now.” He says “it’s hard to love Amazon…at best, you respect Amazon for its obsession to detail, for its cheap prices, and for how it achieves the promised arrival dates for its products.”

Oddly, Merkoski doesn’t mention the Nook division’s terrible performance these days, or the company’s inability to cut into Amazon’s market share. Nooks, he claims, are “downright futuristic.” And that’s really where he wants to go in this book: How will ebooks, reading and writing change?

What’s next: High-speed head plugs and a “Facebook for books”?

Let’s be clear: Merkoski loves books. An endless number of sentences like “Books are priceless,” “Books can inspire us toward greatness,” “Books hold the repository of human knowledge, and then some,” “Reading is an act of bathyspheric descent into the depths of an inky-black ocean,” “For me, it really is about books. They’re not commodities, but soulful voices that actually speak to you” become increasingly irritating as the book goes on and weigh down Merkoski’s ideas on what the future of reading could actually look like.

Once you cut through the platitudes, Merkoski envisions some specific innovations that are interesting and imaginative. For instance, “the future might hold some sort of high-speed plug that goes into an author’s head, some way of taking an author’s imagination and converting it directly into a digital format. The same high-speed cables will connect you to the author’s original experience.” That sounds horrible to me, but another idea — a screenless e-reader that uses a pico projector to project an ebook onto a blank surface (like a ceiling or the pages of a blank book), pulls ebooks from the cloud and is navigated by voice commands — seems like something that could actually exist in a few years.

Ultimately, Merkoski believes there will be

“just one book, a vast book that includes all the others inside it, which I call the Facebook for Books. You’ll be able to start reading from an ebook and naturally segue into a different one, just by following a link. It could be a bibliographic link, or just a link to a book that influenced the author and that’s been annotated as such by a reader like you or me. You will be able to link forward or double-back and keep reading…The more content you get, the more cumulative the connections are between books, and the more intertwined and rich the network becomes.”

The company best situated to make this dream a reality is not Amazon, Merkoski believes, but Google — thanks to its knowledge of search engines and the vast number of titles it’s scanned for Google book search, “Google has digitized more of human culture than any other retailer or library.”

For now, rights issues are in the way, and so books, “our greatest repository of knowledge and inspiration, aren’t participating in conversations with us online, with the exception of public-domain books that lag by at least ninety years.” It will take “a sea-change in opinion about ebook pricing models,” Merkoski acknowledges, before such a hyperlinked database of books can legally exist — even though we have the technology to put it in place now.

A press release laid out some of the new offerings, including:

“Blockbuster films The Hunger Games, the Twilight movies, Tyler Perry’s Madea Gets a Job, Skyfall, Rocky, Fargo, Flight, Paranormal Activity 4, Act of Valor, Safe Haven, House at the End of the Street; independent films from Film Buff’s catalog including Charles Swan and Exit from the Gift Shop; and TV shows like Mad Men, Border Wars, Great Migrations, Amazing Planet; as well as educational content via Little Pim, the leading foreign language learning program for young children, plus many more.”

The Nook Video store already included content from HBO, Sony Pictures Home Entertainment, Starz, Viacom and Warner Bros, plus some Disney movies. Barnes & Noble says the store has “thousands” of titles and is adding “thousands and thousands more.”

A number of Nook Video’s offerings are also available for streaming from Netflix and Amazon Prime Instant Video. Unlike those companies, Nook doesn’t offer streaming memberships — content has to be purchased à la carte on a Nook tablet. (Barnes & Noble says the content will be able to be streamed from its website soon.) It’s certainly an option for someone who already owns one of these devices, but it’s unlikely to draw users away from Netflix, Amazon or iTunes. Adding these titles is B&N’s attempt to create a viable media ecosystem for Nook — and the company insists it’s “committed” to these devices, even as Nook sales plunged in the last quarter.

This story was updated at 3:24 p.m. ET with a comment from Barnes & Noble on how many titles Nook Video contains.

As today’s earnings report revealed, physical stores are doing better than the digital business, with comparable store sales down just 2.2 percent as Nook revenues plunged by 26 percent.

The conversation repeatedly became heated, with one analyst asking why Riggio continues to serve as the company’s chairman even as he tries to buy its stores. The analyst accused Barnes & Noble of ”selling its working business to the chairman while keeping its shareholders beholden to the business that isn’t working.”

When Lynch noted that Riggio also owns shares in Nook Media and said he “isn’t trying to do anything that isn’t in the business of all shareholders,” the analyst pushed back — asking again why Barnes & Noble is “considering selling the business that is doing better to Riggio” while leaving shareholders with Nook Media, which has “no business model.”

At that point, B&N’s retail CEO Mitchell Klipper B&N general counsel Gene DeFelice snapped back, “The loaded question you’re posing really isn’t appropriate for us to discuss on this call.”

B&N retail CEO Mitchell Klipper isn’t normally a participant in the company’s earnings calls, but he was trotted out Thursday to assuage concerns about Barnes & Noble closing more physical stores over the next decade. Klipper had recently told the Wall Street Journal that the chain will have “450 to 500 stores” 10 years from now, compared to 689 today.

Klipper described the article as a “mischaracterization.” Ninety-five percent of our stores are profitable and we have no plans to close any of those…let’s make no mistake about it, folks.” He also spoke of “new store formats” and said B&N plans to open three to five new stores in fiscal year 2014.

“We’re not going to continue doing what we’re doing”

Barnes & Noble released two new Nook tablets last September. Lynch described those tablets as reading-focused and said that as the market shifted to multi-function tablets,” customers simply weren’t looking for B&N’s new products. “We did a lot of work with the consumer post-holiday to find out what happened,” he said. “What we’re seeing is, the larger technology brands have more resonance in that multi-function tablet market than we do. We obviously have to adjust and change … we’re not going to continue doing what we’re doing.” He said there are “announcements forthcoming.”

One analyst asked Lynch if there was anything the company would have done differently when it launched its new tablets. “You look at the numbers and there are absolutely things we could have done differently,” Lynch said. “I’m not going to go into what those are.” He said Barnes & Noble leads in “delivering reading experiences,” citing its apps’ high ratings in the iOS, Android and Windows 8 stores. But “as the market goes to more multi-function tablets, we have to look at how we offer functionality differently and that’s what we’re focused on now.”

“You poured a huge amount of money into a display that really seems not to matter a whole heck of a lot,” one analyst said.

More than once, Lynch mentioned Barnes & Noble’s strength in digital content as such sales were up by 6.8 percent for the quarter. When an analyst asked how B&N defines that content, Lynch explained it comes from “hundreds of thousands of publisher relationships. Our ability to resell their copyrighted content.” In other words, it is the ebooks, digital magazines and so on that Barnes & Noble sells, but that other retailers — like Amazon and Apple — sell as well.

“Umm … is that proprietary?” the analyst responded. “Can somebody [else] turn around and put it on iTunes tomorrow?”

“Each one of those contracts has its own nuance,” Lynch responded. “This isn’t flip the switch, get them done. We were the biggest customers for those publishers on the physical side. There is no flip-switching. It is a strategic asset that is valuable and hard to replicate. And expensive.”

This story was corrected at 1 p.m. to fix Mr. Klipper’s name. He is Mitchell, not Marshall.

The company’s overall revenues for the third quarter of fiscal year 2013 were $2.2 billion, down 8.8 percent over last year. The company saw losses of $6.1 million, or -$0.18 per share, compared to earnings of $0.71 per share a year ago.

Today’s earnings come a few days after B&N’s founder, chairman and largest stockholder, Leonard Riggio, offered to buy the chain’s 689 retail stores and take them private. So how are those stores doing? Not well, but not as badly as Nook is doing. Over the holidays, Barnes & Noble bookstore chain saw sales down at its physical stores and at BN.com as well as in the Nook segment. For the quarter, retail sales were $1.5 billion, down 10.3 percent over last year, “attributable to a 7.3% decline in comparable store sales, store closures and lower online sales.” Core comparable store sales were down 2.2 percent. The company did not break out sales at BN.com.

In response to the problems at Nook, Barnes & Noble said in the earnings release that Nook “is calibrating its business model and has implemented a cost reduction program that the company projects will significantly reduce Nook’s expenses.” As a reminder, Nook is the segment of the business that’s supposed to be doing well: Barnes & Noble spun it off, along with the college bookstores, into a subsidiary called Nook Media last year, with investments from Microsoft and Pearson. For fiscal year 2013, the company said it expects Nook Media revenues to be $2.5 billion. Previously, it had estimated revenues of $3 billion for the segment.

In a statement, B&N CEO William Lynch said the company has “taken significant actions to begin to right size our cost structure in the Nook segment, while also taking a large markdown on Nook devices in order to enhance our ability to achieve our estimated sales plans in subsequent quarters.” Lynch said Nook “remains committed” to the tablet and e-reader business, likely in response to a New York Times article earlier this week that cited an unidentified source who said Barnes & Noble would “move away” from building devices.

Lynch also said, “Without question, our bookstores have made a significant contribution to Nook’s success over the past three years. And, in turn, our award-winning line of Nook’s products have proven to be a strong driver of traffic to our stores.”

Barnes & Noble is holding an investor call at 10 a.m. ET, and we will be on the call.

Riggio’s offer would take Barnes & Noble’s 689 retail stores and BN.com private, and would exclude the college and digital businesses, which Barnes & Noble spun off into a separate entity, Nook Media, last year with investments from Microsoft and Pearson.

The offer comes at a time when Barnes & Noble’s retail and digital businesses are both struggling. The company is set to report its Q3 2013 earnings on Thursday, February 28, and has warned investors of greater-than-expected losses for Nook. It also plans to close up to a third of its retail stores over the next decade. Separately, a New York Times article on Sunday cited a “person familiar with Barnes & Noble’s strategy” who said the company’s poor quarter “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.”* B&N spokeswoman Mary Ellen Keating said, “To be clear, we have no plans to discontinue our award-winning line of Nook products.”

Barnes & Noble said it’s formed a strategic committee to evaluate Riggio’s offer, with Evercore Partners as financial advisor and Paul, Weiss, Rifkind, Wharton & Garrison as legal advisor. The company said there ”can be no assurance that the review of Mr. Riggio’s proposal or the consideration of any transaction will result in a sale of the retail business or in any other transaction. There is no timetable for the Strategic Committee’s review.”

*Also see my ebook predictions for 2013.

In a press release sent out after the market closed Wednesday, Barnes & Noble said it ”expects its fiscal year 2013 Nook segment EBITDA loss to be greater than it was in fiscal 2012 and expects fiscal year 2013 Nook Media revenues to be less than $3 billion.” Previously, B&N had expected Nook Media’s FY 2013 revenues to be $3 billion, with EBITDA losses comparable to those in FY 2012.

Barnes & Noble had also been set to announce its third-quarter earnings for fiscal year 2013 on February 22, but said Wednesday it will actually report them a week later, on February 28.

Nook Media is supposed to be the profitable part of the company. Consisting of B&N’s Nook and college businesses, Barnes & Noble spun it off in 2012 with a $300 million investment from Microsoft and, as of late December 2012, an $89.5 million investment from Pearson. (Barnes & Noble holds 78.2 percent of Nook Media.) Instead, Nook is doing worse at the same time that Barnes & Noble’s other segments — retail stores and BN.com sales — are also doing badly. Over the holidays, Nook device sales, BN.com sales and in-store sales all fell compared to the previous year. And the company plans to close up to a third of its retail stores over the next decade.