Microsoft Carves a Notch in Nook

Microsoft on Monday said it will pay US$300 million to get a piece of Barnes & Noble’s Nook tablet action for the Windows 8 platform.

The two companies will partner in a new Barnes & Noble subsidiary which will push further into the education market.

Barnes & Noble will initially create a Nook app for Windows 8.

The bookseller has been seeking new ways to monetize its highly profitable Nook business since January, when it announced record sales for that division.

Lay Down Your Weapons

The subsidiary to be created by the strategic partnership will focus on the digital and college businesses of Barnes & Noble. Microsoft will invest $300 million in the subsidiary for a 17.6 percent equity stake. That investment is valued at $1.7 billion.

The new subsidiary, which Microsoft tentatively calls “Newco,” will have an ongoing relationship with Barnes & Noble’s retail stores, Microsoft said.

This could result in Windows 8 tablets loaded with the Nook app being sold in the bookseller’s stores.

A presence on the Windows 8 platform will extend Nook’s reach by providing e-books, magazines and newspapers to hundreds of millions of Windows customers in the United States and abroad, Microsoft said.

Newco will distribute Barnes & Noble’s Nook Study software, Microsoft said.

The agreement also saw Microsoft and Barnes & Noble settling their patent litigation over the use of the Android platform in the Nook.

Microsoft said Barnes & Noble has not yet decided how to structure the new subsidiary and hasn’t yet agreed on the name “Newco.”

Microsoft declined our request for comment for this story.

Reflections on the Deal

Microsoft “likely sees this as a leverage point of sorts for widening its position in the education market,” Charles King, principal analyst at Pund-IT, told the E-Commerce Times. “If students buy textbooks for the Nook, a Nook app for Windows 7 laptops or tablets might be pretty attractive.”

Further, a Windows 8-based device might offer Barnes “a way of clearly differentiating itself from Amazon’s Kindle, especially the Fire,” King pointed out.

The timing of the announcement is highly strategic, given that the United States Department of Justice filed suit against Apple and several publishers earlier this month over their alleged conspiracy to raise retail e-book prices and limit competition in e-book sales, King suggested.

“If Apple’s position in the crosshairs of the … investigation impacts its position in the education market, [this deal] should offer Microsoft and Barnes & Noble multiple commercial opportunities,” King explained. Further, it will offer an alternative to Amazon’s domination of the market.

Amazon’s Kindle Fire tablet reportedly has about 50 percent of the Android tablet market in the U.S.

It’s All About the Learning

If the subsidiary is successful, “it will put Microsoft back into schools and on tablets, where they have been bleeding badly,” Rob Enderle, principal analyst at the Enderle Group, told the E-Commerce Times.

Schools “are the seed corn for the rest of the market, and if you lose that, you will likely eventually lose business, at least with respect to the client platform,” Enderle said. Further, the tie-up with Microsoft will “remove the cloud” of possible failure that hung over the Nook. There have been concerns that Barnes & Noble might go belly up because of competition from Amazon, like Borders did.

The timing of the announcement gives Microsoft and Barnes & Noble four to five months to get a product ready in time for the kick off of the school year in September, Pundit’s King stated.

However, much work remains to be done for the combined Microsoft-Barnes & Noble subsidiary.

“Just removing the cloud of possible failure won’t be enough,” Enderle pointed out. “They still have to come up with a solution education finds compelling.”

Barnes & Noble did not respond to our request for comment for this story.

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