This year’s holiday report was notably subdued compared to last year’s, which touted “record Nook sales” (though even then, the Nook Simple Touch e-reader’s sales were so poor that the company adjusted its 2012 guidance downward) and large increases in digital content, retail and store sales.

The Nook segment — which includes devices, digital content and accessories — had revenues of $311 million, down 12.6 percent from last year* and a far cry from the $1.5 billion in comparable sales that CEO William Lynch had expected last year. While digital content sales — ebooks, newsstand, and apps — increased by 13.1 percent (compared to an increase of 113 percent last year), the decline was driven by lower device sales, which Barnes & Noble didn’t break out. However, the company noted that Nook sales declined “due to lower unit volume and average selling prices.” Barnes & Noble launched the Nook in the U.K. this fall, but the company didn’t mention sales performance there.

“Nook device sales got off to a good start over the Black Friday period, but then fell short of expectations for the balance of holiday,” CEO William Lynch said in a statement. “We are examining the root cause of the December shortfall in sales, and will adjust our strategies accordingly going forward.”

Retail sales — consisting of physical stores and BN.com — had revenues of $1.2 billion, down 10.9 percent from last year. Barnes & Noble didn’t break out physical stores versus BN.com, but said the “decrease was attributable to an 8.2 percent decline in comparable store sales, store closures and lower online sales.” (In the 2011 holiday season, BN.com sales were up 43 percent over 2010.) “Core comparable store sales” — which exclude Nook products — fell by 3.1 percent “due to lower bookstore traffic.”

*In the 2011 holiday season, Nook revenues were $448 million, suggesting a steeper drop to $311 million, but a spokesman said the $448 million “included the actual selling price for ebooks sold under the agency model rather than solely the commission received. We ceased reporting on this metric in FY13. This year’s $311 million is solely on the commission received, as are comparisons to last year.”

The Nook segment — including devices, digital content and accessories — had revenues of $160 million, up 6 percent over last year, and the company said digital content sales (ebooks, apps and newsstand) were up 38 percent over last year. Also, “Nook unit sales doubled over the four-day Black Friday weekend, across all channels, based on information provided by our channel partners on a sell-through basis compared to the similar period last year. The growth was driven by increased promotional activity at channel partners, particularly Walmart and Target.” (The non-statistic echoed Amazon’s announcement earlier this week that Kindle device sales “more than doubled last year’s record” over the holiday weekend, but neither Amazon nor Barnes & Noble released actual device sales numbers. Barnes & Noble’s announcement could also be seen as a jab at Amazon, since Walmart and Target recently announced that they will no longer carry Kindles.)

CEO Lynch: Fast growth in self-publishing

In an investor call following the earnings report, Barnes & Noble CEO William Lynch said “growth in ebooks moderated during the quarter” not just for Barnes & Noble but for publishers as well, and “I’m almost sure for Amazon.” This is normal, he said, and he expects ebook sales to grow again after the holidays when consumers receive new devices. Lynch said the fastest-growing category of digital content was “self-published areas.”

In response to a question about Barnes & Noble’s ebook market share, Lynch said, “Unlike the past quarters, we don’t have confirmation that we grew share.” But he said the company “almost certainly” maintained a 25 percent share of ebooks sales. (Amazon’s ebook market share is estimated at 55 to 60 percent, with Apple taking about 10 percent and other retailers splitting the remaining five to ten percent.)

Lynch also commented on discounting of HarperCollins titles following the publisher’s settlement with the Department of Justice in the ebook pricing lawsuit. HarperCollins was the first publisher to negotiate new contracts with retailers, which allow the retailers to discount HarperCollins ebooks. (The other two settling publishers, Hachette and Simon & Schuster, still haven’t negotiated new contracts. Despite the new discounting, HarperCollins has not seen big changes in sales, Lynch said. “That was a big epiphany…There wasn’t much elasticity. If someone wants to buy a John Grisham book [John Grisham is a Random House author, but whatever] in an electronic format, they’re going to pay $11.99 or they’re going to pay $10.99.” Barnes & Noble sees that as good news, because it suggests that readers are more concerned about author brands than about price. But the question is what happens if Amazon deeply discounts the well-known author brands and Barnes & Noble can’t match Amazon prices.

Barnes & Noble and Microsoft recently finalized a partnership to spin off B&N’s Nook and college businesses into a separate company, Nook Media. Microsoft is investing $300 million in Nook Media and will hold a 17.6 percent stake. Barnes & Noble is also expanding its Nook business into the U.K. Lynch acknowledged that Amazon holds “something north of a 90 percent share” of ebook sales in the U.K., but said Barnes & Noble is “in the U.K. for the long haul” and will be “a strong number two there over time.”

Photo courtesy of Flickr / keone

The partnership means more ebooks and a Nook app for Windows 8. “We look forward to working closely with our new partner Microsoft to add value to their innovative new platform by bringing great reading experiences and one of the world’s preeminent digital bookstores to millions of Windows 8 users,” Barnes & Noble CEO William Lynch said in a statement.

The partnership will also focus on international expansion. Barnes & Noble is launching the Nook in the UK for the first time this fall, and Microsoft president Andy Lees said Microsoft is “excited by Nook Media’s product roadmap and expansion into markets around the world as demonstrated by their recent launches in the United Kingdom.” Microsoft will pay Nook Media $25 million a year for the first five years to assist with the development of local-language reading content and technology.

“We’re Barnes & Noble and books is one of our main categories,” Theresa Horner, B&N’s VP of digital content, said at a briefing Tuesday. I’d say it’s the main category, but either way, the company is using reading and recommendations as a selling point for the new tablets.

“You have an iPad, I have one”

Barnes & Noble is in a weird position because it’s not the iPad or the Kindle Fire. “You have an iPad, I have one,” said John Basanese, director of software QA engineering, at the briefing. The Nook HDs clearly aren’t in the same category as the iPad, but they’re also in the same range as a bunch of other budget tablets, and Nook devices haven’t been as popular as Kindles. So how does Barnes & Noble promote them? They do this by touting the tech specs — “the lightest, lowest full HD tablet ever,” with a display designed to take advantage of the new Nook Video — but also by promoting family-friendly and reading features.

First, the specs: The Nook HD has a 7-inch screen with 1440 x 900 resolution and 243 pixels per inch and supports 720p HD video playback. It comes in an 8 GB model ($199) and a 16 GB model ($229). Its battery life is up to 10.5 hours for reading and up to 9 hours of watching video.

The Nook HD+ has a 9-inch screen with 1920 x 1280 resolution and 256 pixels per inch and supports 1080 HD. It comes in a 16 GB model ($269) and a 32 GB model ($299), both of which are cheaper than the new Amazon Kindle Fire HD with Wi-Fi. Its battery life is up to 10 hours of reading and up to 9 hours of video.

Both tablets have expandable memory, up to 64 GB and both have Wi-Fi and Bluetooth. No 3G, no 4G, no GPS.

In the US, the tablets can be preordered starting Wednesday and will ship in late October. They will also be available in the United Kingdom, beginning in late November.

The company declined to discuss whether earlier Nook tablet models get price drops with the launch of the new devices, but Chris Peifer, VP of digital development, said the Nook Color is “very close to its end” and the company is no longer making new ones.

On to those family-friendly features: “The average American woman’s hand is 172 millimeters,” and B&N says it designed the Nook HD so that the average women can easily hold it in one hand. This means the Nook HD is longer and skinnier than the Kindle Fire (both have the same size of screen but the Kindle Fire has a wider bezel).

At the briefing, company reps spent a disproportionately long time focusing on “family profiles,” which let parents and kids (up to six accounts total) share one device. Adults creating profiles for children can set limits on what their kids can and can’t do on the tablet. For example, they can ban shopping completely or allow “kid-friendly” shopping, which allows children only to access “safe” content from a preselected list. (Basanese mentioned “some self-published content” as an example of content that would not be kid-friendly.) The new Kindle Fires contain similar kid-limiting features.

Bringing “human” booksellers’ knowledge to the tablet

Until now, B&N’s chief Nook bookseller Jim Mustich said, the company hasn’t translated “all of the knowledge that makes our stores gathering places for people and allows people to discover things” into its devices. In other words, how do you bring a bricks-and-mortar bookstore experience to a tablet? “We’re tapping into the human knowledge of Barnes & Noble and our booksellers,” Mustich said.

So now you can browse Barnes & Noble’s store from directly inside a book. If you’re reading a Rachael Ray cookbook, for example, tap the bottom of the screen to pull up other books by her and similar titles. “We’re trying to integrate that shopping experience from right inside the book,” Horner said. “We don’t require somebody to go to the shop.”

The company is introducing “Nook Channels,” curated collections of books that “speak to a certain type of reading or a certain type of content.” Mustich says the company had the idea when he and B&N CEO William Lynch were in an elevator together and Lynch mentioned that he’d liked Ernest Hemingway’s The Sun Also Rises and wanted to read other books like it. If you look up that title in other online bookstores, Mustich says, “you get a high-school reading list, books like The Great Gatsby, when what you really want is James Salter.”  The channels have titles like “Digging into Murder,” “Jane Austen & Heirs,” and “International Intrigue.” Each contains 40 to 50 titles, most curated by Barnes & Noble booksellers. The channels will eventually include other types of content, too (like movies), and users will be able to improve recommendations by ‘liking’ or ‘not liking’ books that pop up in their stream.

It’s our job to “tease out what the reader likes,” Mustich said. “We really want the discovery process to be associated with the Nook.”

Similarly, on the home screen of the new Nook HDs, there’s a “Your Nook Today” button. Tap it and it pulls up the weather in your city, a book recommendation based on the content on your device, and “a three-minute read,” a short piece of editorial content that Mustich described as “a small way to promote engagement.”

“Rip out the page”

With the new tablets, Barnes & Noble is improving its magazine-reading experience and also adding about 100 catalogs — from retailers like L.L. Bean and Pottery Barn — for free browsing. Users can pinch out to view a “visual table of contents, and tap products in a catalog to buy them online. In a Pinterest-inspired feature, they can also “rip out a page” from a catalog or magazine by swiping their finger down the screen. This adds the page to a “scrapbook” that can be accessed from the tablet’s home screen, so users can create inspirational idea books on different themes. This only works on catalogs and on magazines that you purchase, of course. It doesn’t apply to books and the scrapbooks can’t be exported to Pinterest or as a PDF, which limits this feature’s usefulness. Still, it’s interesting to see a tablet incorporate these curating and pinning features.

*Nook revenue is comprised of Nook devices, digital content and accessories.

A holiday sales spike following the launch of the Nook Tablet in November 2011 hasn’t been enough to sustain the Nook business. And despite the launch of the front-lit Nook e-reader in April 2012, Nook business revenues are flat compared to this time last year.**

Microsoft is investing $300 million to spin off Barnes & Noble’s Nook and college businesses into a new company. But these revenue figures suggest that’s a bad bet. (Note: Amazon doesn’t release Kindle revenue figures at all. Its ebook market share is higher than Nook’s, but we don’t know how Kindle revenues compare, though here’s our best guess. B&N’s relative openness makes it easier to write a post like this about the Nook business. Amazon offers a lot less to go on.)

E-reader problems

Barnes & Noble has had particular trouble with e-ink devices. The Nook Simple Touch e-reader (without GlowLight) had such poor holiday sales that B&N downgraded its full-year guidance. And in Tuesday’s earnings report, Barnes & Noble said that “production scaling issues” prevented it from filling orders for the Nook Simple Touch with GlowLight. That was a “missed opportunity,” CEO William Lynch acknowledged in an investor call following the report.

Nook with GlowLight may have great reviews from Consumer Reports and tech blogs and B&N may have beat Amazon (AMZN) in the launch of a front-lit e-reader. But that doesn’t matter if people can’t actually get their hands on one. Amazon is widely expected to release its front-lit Kindle this fall, and it appears B&N has already squandered its first-mover advantage.

Falling prices

Barnes & Noble also attributes falling Nook device revenues to price cuts. But the company is going to have to keep dropping prices on its e-readers and tablets to stay in line with Kindle and with budget tablets like Google’s Nexus 7 and the anticipated iPad Mini. It can’t increase prices to increase revenues.

International delays

Barnes & Noble and Microsoft are hoping to find salvation overseas. The Nook will launch in the U.K. this fall — first through an online storefront, nook.co.uk, though B&N promises that well-known retail partners will be announced soon. And Microsoft will spend $25 million a year for five years on international launches. But Kindle has already been in the U.K. for two years and recently partnered with British bookstore chain Waterstone’s to sell Kindles in its stores. Rakuten’s Kobo is already in the U.K., too, and both companies are expanding rapidly to other countries. Microsoft’s $25 million payments could help B&N catch up, but it is already far behind.

Slowing ebook sales

In Tuesday’s earnings call, B&N’s Lynch said apps and digital newsstand sales growth is “a little higher” than ebook growth. Lynch noted that book publishers are also seeing slower ebook sales (and here are Publishers Lunch’s recent findings on that). Nook’s ebook market share is still between 25 and 30 percent, the same as it was a year ago. It’s nice if apps and newsstand can drive some sales. But Barnes & Noble is going to have an even tougher time competing on those products than it does on ebooks. Apple and Android have the app market cornered, and digital magazines make up just a tiny sliver of overall magazine sales.

Resources

Barnes & Noble Q1 2013 earnings report (our post here)

Earnings call transcript

An earlier version of this article stated that Barnes & Noble’s app and digital newsstand *sales* are higher than ebook sales. That is incorrect and I apologize for the error. Lynch was referring to the growth rate, not overall sales numbers.

** Or they’re down: The Digital Reader points out that Barnes & Noble previously reported Nook sales of $277 million for the period ending July 30, 2011, but now says they were $191.4 million. A Barnes & Noble spokesperson said the discrepancy is due to accounting for agency pricing and the $191.4 million reflects the actual selling price of ebooks.

That could help someone gain quick information on their Nook about a book, making it easy to go from browsing to buying. Consumers could also choose to just buy a printed book in the store with the additional information gleaned from the Nook. The model would help ensure that showrooming leads to sales through Barnes & Noble, whether users ultimately purchase a print or e-book, instead of sending them online and possibly Amazon.

Lynch tells Fortune:

We’re going to start embedding NFC chips into our Nooks. We can work with the publishers so they would ship a copy of each hardcover with an NFC chip embedded with all the editorial reviews they can get on BN.com. And if you had your Nook, you can walk up to any of our pictures, any our aisles, any of our bestseller lists, and just touch the book, and get information on that physical book on your Nook and have some frictionless purchase experience. That’s coming, and we could lead in that area.

The NFC integration can shorten the amount of time it takes to pull up information on a mobile device. Users could also do this by scanning a QR code or bar code from their smartphone, but the process is usually slower.

Lynch also explains how Nook could integrate with Microsoft Office:

So again we haven’t announced anything specifically, but imagine an integration where an information worker, student, author, consumer, creates something in Office and has it immediately published for sale through the Nook book store. It starts to open a lot of exciting possibilities.

Barnes & Noble “intends to explore all alternatives for how a strategic separation of NewCo may occur,” the release says. The 8-K filed this morning explains that under a separation “B&N would continue to sell NewCo’s devices and device accessories and provide service and accept returns in B&N’s retail stores.”

The partnership with Microsoft “will allow us to significantly expand the business,” said B&N CEO William Lynch. Part of that expansion is a Nook app for Windows 8, “which will extend the reach of Barnes & Noble’s digital bookstore by providing one of the world’s largest digital catalogues of e-books, magazines and newspapers to hundreds of millions of Windows customers in the U.S. and internationally.” The release notes that B&N and Microsoft settled their patent litigation and “Barnes & Noble and NewCo will have a royalty-bearing license under Microsoft’s patents for its Nook e-reader and tablet products.”

Microsoft’s Andy Lees said, “Our complementary assets will accelerate e-reading innovation across a broad range of Windows devices, enabling people to not just read stories, but to be part of them. We’re on the cusp of a revolution in reading.” As my colleague Kevin Tofel notes, Microsoft has experimented (mostly unsuccessfully) with e-reading in the past, and the B&N partnership could help it regain some momentum.

A focus on international growth

Barnes & Noble has said it will launch the Nook in the UK this year, reportedly in partnership with bookstore chain Waterstones, but the London Book Fair came and went with no announcement.

In an investor call following the announcement this morning, Lynch said “the large majority [of new users] are going to be incremental. If you look at where most of our content sales come from today, clearly we think the biggest opportunity through this partnership is in terms of growth internationally.” He added, “Anything internationally by definition is incremental because we haven’t been there yet.”

Microsoft will help cover the costs of international expansion. The 8-K explains that Microsoft will pay NewCo $25 million a year for the first five years, “for purposes of assisting NewCo in acquiring local Reading Content and technology development.” As Publishers Marketplace notes, “local actually means international.”

Microsoft will make advance payments to NewCo

According to the 8-K, Microsoft will pay NewCo $60 million for each of the first three contract years and an unspecified amount after that, up to an unspecified amount. Microsoft gets an unspecified revenue share from NewCo.

Publishers will sign e-book contracts with NewCo, not B&N

“Content lies” with NewCo, Lynch said. “The relationships with publishers will be Newco relationships.” In other words, book publishers would sign e-book contracts with the new company, not with Barnes & Noble.

Don’t worry too much about the Android part for now

The Nook e-readers and tablets are Android-based. Windows is not! “We’ve always said we want readers to be able to read in the device of their choosing,” Lynch said, adding, “if you want to read your book on an iOS product or Android product…you can of course do that.”

However, the 8-K notes that “NewCo will use the [Windows Phone] Marketplace as the in-application commerce transaction platform, when available, for commerce transactions in the NewCo Phone App, including payments and fees associated with Content acquisition and subscriptions (if available). NewCo will ensure that the NewCo Phone App will provide for in-app purchasing and will not link out of the NewCo Phone App to complete purchases of Content.” That would mean a change to Nook iOS apps, which currently get around Apple’s revenue share requirements by not allowing in-app purchases.

Apps are “huge,” Lynch said in the call following this morning’s earnings report. Angry Birds is still the company’s most-downloaded app, while Netflix “toggles between #2 and #3.”

When asked if Barnes & Noble will release a tablet with a larger screen — as it is rumored that Amazon (NSDQ: AMZN) will in coming months — Lynch declined to discuss specific form factors, but said the company “will innovate in the areas we think we can add value. There’s a lot of innovation left in digital reading.” One comment could be seen as a hint at a digital video service: “We’ve always sold a lot of products in entertainment and we’ve had a big DVD business in our stores.”

Lynch said that customers who buy Nooks also spend more on print books, echoing the sentiment expressed by B&N’s Jim Hilt at Digital Book World last month. “They not only buy the hardware, accessories, warranties and, more meaningfully from a margin standpoint, the digital content,” he said, “but they also continue to buy phsyical books. The idea that people who are digital readers just stop buying physical books is…not true.” This contradicts recent Bowker research suggesting that the majority of e-book “power buyers” switch to digital books exclusively within a year.

Lynch wouldn’t say whether Barnes & Noble is taking a loss on its new $199, 8GB Nook Tablet. (According to market research firm IHS iSuppli, each $199 Kindle Fire costs $209.63 to manufacture.) The $249, 16 GB version is “gross margin positive,” he said. “We feel good about this product as well.”

Revenues were $2.4 billion, up 5 percent from last year, with earnings of $52 million on $0.71 per share — lower than analysts’ estimated $1.01 per share but, according to B&N, “impacted by the dilutive impact of the convertible preferred shares held by Liberty Media.” The company also deferred income from textbook rentals. Without those effects, B&N says, earnings would have been $0.99 per share — roughly flat with earnings of $1 per share this time last year.

Sales: In-Store And Digital In-store sales increased 2 percent over last year, to $1.49 billion, though comparable store sales grew more slowly than this time last year — up 2.8 percent compared to 7.3 percent a year ago. Physical book sales in retail stores were up over 4 percent over last year.

Sales at BN.com increased 32 percent over last year, to $420 million, and consolidated Nook business increased 38 percent to $542 million. Nook unit sales were up 64 percent over last year — not surprising since Barnes & Noble introduced both the Nook Simple Touch e-reader and the Nook Tablet since that time — but the company did not break out that figure in dollars. Digital content sales, including e-books, digital newsstand and apps, increased 85 percent on a comparable basis but again were not broken out in dollars. In its holiday sales report, the Nook Simple Touch’s sales were so bad that Barnes & Noble actually downgraded its projected full-year earnings, to $150 to $180 million. That range remains the same with this earnings report.

Textbook rentals negatively impacted Barnes & Noble’s College sales, which declined 3 percent to $525 million. As noted above, the company says deferred income from textbook rentals also affected its earnings per share, “the majority of which will be realized in the fourth quarter.”

E-Book Market Share Appears Flat Including the 8 GB Nook Tablet launched this morning, Barnes & Noble has released three new devices since its 3Q 2011 earnings report, yet it is not gaining much market share against Amazon (NSDQ: AMZN). “According to some of the largest U.S. publishers, we maintained or slightly gained share in the e-book market during the third quarter,” Lynch said in the press release. He did not say what Barnes & Noble’s e-book market share is, though he has said in the past that it is around 26 percent (compared to Amazon’s estimated 55 to 60 percent). He may say more in this morning’s earnings call.

Spending On Nook EBITDA fell 12 percent overall, to $150 million, with particular losses on the BN.com side “as the company continued to invest in its rapidly growing Nook business, including advertising costs and personnel.”

In its holiday earnings report, Barnes & Noble said it might spin off its Nook business, which it believes is undervalued, but did not mention that in this report. The company is also reportedly seeking to unload Sterling Publishing.

Lynch went on to say, in an awesome sentence, “We know that one of the goose that have laid the golden egg here in our success with Nook has been the showrooms that the stores provide, and we’ll continue to have a very symbiotic relationship there. We get that.”

In the interview, Lynch hoped to quell investor and analyst concerns that Barnes & Noble is worthless without a digital component, and that the company does not have enough capital to sustain its digital business. He stressed the Nook business is “undervalued” and said, “We have enough capital to execute our business strategies….There are whole industries looking for businesses of this kind, growing at this trate, with these kinds of variable margins, and so we feel good about it.”

Here’s the video (also here at CNBC’s site). My transcript of the good parts of it, which is way better than CNBC’s weird computer transcript, is below. A screenshot from the segment, below, shows Barnes & Noble’s e-reader market share at 13 percent–about half of the 27 percent Barnes & Noble said it was as recently as November. “Estimates” is cited as the source and it is unclear if these are directly from B&N; I’ve asked the company and will update the post when I hear back.

William Lynch: “The growth is going to be in digital, hence our investments in digital and how we’ve scaled that business. But the physical book business, by any measure and any projection, will continue to be the largest part of the business, and we’ve been growing share there, and in fact growing the business in absolute terms…That is a very profitable side of the business.”

David Faber [sounding incredulous]: “And you expect that to continue? You would expect to see continued increases in physical sales of books, let’s say next year over this year?”

Lynch: “No, we’ve built into our models, clearly, a decline in physical–”

Faber [interrupts]: “So what happened this year? Why were people suddenly buying more books than they had over the last few years?”

Lynch: “Well, we gained a lot of share, there are fewer places to buy books in this country…”

…

Faber cites a concern from a Barclays analyst that “‘absent a launch period, demand for Nook products appears to be decelerating faster than original management forecasts.’ Is that true?”

Lynch: “Our Nook device business grew 70 percent year-on-year. I challenge anybody to find a company selling mobile devices, many companies selling mobile devices, that had that kind of growth…I read in the Wall Street Journal (NSDQ: NWS) a publisher cited that apparently we had the fastest growth in e-books this Christmas.”

Faber: “I saw that as well, but sales of the Nook Simple Touch did seem to miss expectations, correct?”

Lynch: “It did, yeah. So–we mis-forecast–Nook–uh, Nook Tablet exceeded expectations, and on Nook Simple Touch, last year we ran out of our black and white e-reading product, which is what the Nook Simple Touch is [note: The Nook e-reader available for Christmas 2010 was the first-generation e-reader, not the Simple Touch], in mid-December, and as we looked at that data point, we over-anticipated the growth this year, and that was a forecasting mistake, but overall we were very pleased with the growth of the portfolio.”

Faber: “How long you going to take to decide what to do with the Nook business?”

Lynch: “As long as it takes–”

Faber: “It introduces some uncertainty within a company, typically you would want, I would assume, to make the decision as fast as possible.”

Lynch: “Speed isn’t a factor here. We may do nothing. We called it an exploratory, and if you look at that business in 2 years, it’s grown to $1.5 billion, amazingly valuable space…We’ve established the #2 brand, we grew share faster than anybody in e-books last year. Apparently, according to that publisher, we continue to do that, uh, last week coming off a holiday, so it just made sense to explore our options there. We think it’s undervalued, clearly it’s being undervalued.”

Faber asks if Barnes & Noble needs another investor to help it grow the business. “What about a Google?”

Lynch: “I’m not going to comment–we have enough capital to execute our business strategies. Now, the tolerance for the investment in this business, clearly, some investors have different tolerance than others. I will tell you, uh, to the extent, um, there are whole industries looking for businesses of this kind, growing at this rate, with these kind of variable margins, and so we feel good about it. Our lifetime value calculations on the customer warrant the kind of investments we’re making. We have a billion-dollar credit facility and plenty of room under that facility. We’ve been growing share faster than anyone, we can compete, um, there are different strategies that we could pursue to help us compete even better, and we’re looking at a whole host of them.”

Faber: “So you can take on Amazon (NSDQ: AMZN) and Apple (NSDQ: AAPL) and their incredibly deep pockets?”

Lynch: “I don’t think we’re competing with Apple, the iPad on Apple.” [Throughout the conversation, Faber does not distinguish between e-ink readers and tablets.]

Faber: “Well, I mean the iPad and the Kindle and the obvious ability on both of those devices to buy books as well, not from Barnes & Noble.”

Lynch: “Well, certainly we view Amazon as a competitor, and two years ago when we launched our digital bookstore and launched the Nook, everyone told us they’re a formidable competitor. That is absolutely true, and in that time we’ve been very successful. We believe, certainly, that there will be more than one digital and media book retailer in this country. There’s too many people aligned to ensure that happens–publishers, third-party retailers, and we’ve been competing very well, so yes, we absolutely believe we can compete, and continue to succeed.”

Faber: “And final question, I mean in terms of the Nook itself, if you were to separate it, aren’t you ultimately taking business away from the sale of books, and it seems to be so wound into the phyiscal stores, and the delivery of the device in some ways at the stores, that it would seem hard to separate the two.”

Lynch: “Yeah, that’s a good point, David. Whatever we do, we will continue to have a tight relationship between the Nook and those stores and the Nook will continue to be Barnes & Noble’s e-reader. In terms of separating the two, there are a lot of different options and ways we can do that. We know that one of the goose that have laid the golden egg here in our success with Nook has been the showrooms that the stores provide, and we’ll continue to have a very symbiotic relationship there. We get that.”

Faber: “OK, and I’m going to still be able to bring my grandkids to a bookstore?”

Lynch: “Absolutely. Barnes & Noble, for sure.”