"This goes a long way toward addressing what was perceived as a gap in our tablet offering," Chief Executive Officer William Lynch said in an interview. This will make Nook one of the "most versatile" entertainment tablets in the market, he said.
Nook users will have access to more than 700,000 applications from Google, compared with the 10,000 options currently available in Barnes & Noble's application store. The Barnes & Noble store will remain on devices and will still be used to buy and download digital books and magazines.
The deal will also allow Nook users for the first time to buy and download music. Before the deal, Nook users couldn't access any Google applications despite the devices running on Google's Android operating system.
The addition of Google's services will boost device sales and help the company get through some of the inventory left over from the holidays, Lynch said. Barnes & Noble will try to leverage Mountain View, Calif.-based Google's name by using it in marketing, including on signage in stores, he said.
Increased competition in the third quarter forced discounting, writedowns and a net loss in what is supposed to be Barnes & Noble's most profitable period. At that time, Lynch said he would make Nooks more functional after pitching them as tablets for readers.
Barnes & Noble is also considering selling its 680 retail stores and website to founder and current Chairman Leonard Riggio, who announced his interest in such a deal in February. Just three days later on Feb. 28, Lynch tried to calm investors' concerns about the deteriorating Nook business after sales sank 26 percent. Lynch declined to comment on how the deal is progressing.
If completed, it would leave Nook Media, which includes Nook and its college bookstore business, in the public company. Barnes & Noble placed the two divisions together in Nook Media when Microsoft invested with the goal of possibly separating them from the retail unit.
Nook Media had an operating loss of $190.9 million and sales of $2.18 billion in the three quarters through Jan. 26. Nook drove those losses as it hasn't turned a profit yet as it spends on marketing and developing devices to compete in the tablet market with the deep pockets of heavyweights such as Apple Inc., Amazon.com Inc. and Google.
As Nook Media is losing money, analysts have questioned how it will be funded. The company said in February that Nook Media has been self financed since October when it was officially formed as a result of investments from Microsoft and publisher Pearson Plc, which totaled almost $400 million, and the cash generated by the college business.
The first Nook was unveiled in late 2009 as a way into the e-reading market that Amazon was dominating with its Kindle. Within two years, Barnes & Noble had claimed the second-biggest portion of the U.S. e-book market.
It's 7-inch Nook Color tablet, released in 2010, also became a hit as a cheaper, smaller option to Apple's iPad. Since then, Apple and Amazon have entered that market by making tablets of a similar size.
"We kind of created the 7-inch tablet category," Lynch said. "We had the field all to ourselves and it's gotten more competitive."
New Nooks will remain priced at $199 for the HD model and $269 for the HD+ model. Barnes & Noble declined to comment on the financial terms with Google.