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Microsoft sides with Barnes & Noble to tackle Amazon and Apple, to invest $605 million in B&N

May 1, 2012
Barnes & Noble's Nook
Barnes & Noble's Nook

Though Microsoft is no stranger to patent battles of its own, the company isn’t shy of reaching a win-win settlement with other corporations. It looks like Redmond just killed two birds with one stone when it decided to jump into the e-book market by investing in Barnes & Noble’s Nook reader, while settling its patent lawsuit against the e-reader company.

Announced yesterday, the deal between Microsoft and Barnes & Noble Inc. sees Microsoft getting 17.6% share of the newly established e-book and college book business unit, in exchange for $300 million, which will leave B&N as the majority shareholder with $1.4 billion. Over the next five years, Microsoft plans to inject an additional $305 million.

Barnes & Noble has toyed with the idea of spinning off its Nook and e-book business, which has been the saving grace for the company’s brick-and-mortar bookstore chain, at a time when less people choose to purchase physical books and opt for digital ones instead. Though it wasn’t first to release an e-book reader to the market, Barnes & Noble’s Nook digital reader was still able to capture a 27% market share, against Amazon’s Kindle 60% share and Apple’s 10%.

With the backing of Microsoft, Barnes & Noble will have more financial resources to support the R&D effort of its e-book reader, which has proven to be quite expensive and dragged down its profit in the past. According to William Lynch, the company’s chief executive officer, the partnership will allow Nook to branch out to the international market and to develop new reading software that will run on Windows platform.

Microsoft, on the other hand, will get a strong footing right off the bat in the increasingly lucrative digital book market, one that even Apple has been pushing aggressively with the introduction of iTunes U, a dedicated college textbook service. With six months to go before Microsoft is expected to launch its touch-friendly Windows 8 operating system, this guarantees the inclusion of a Nook app on the upcoming tablets. Let’s not discount the possibility of future Nook tablets and e-readers running Windows 8 OS as well.

An analyst at McAdams Wright Ragen, Sid Parakh, puts it best: “It gets Microsoft in the game for e-readers, and gives them access to a market that has been growing nicely and they’ve basically sat out of. It also makes Windows 8 a more compelling platform from an e-readers perspective,” he said.

Considering the amount of money that Microsoft has, the planned $305 million can be considered as a very small investment, but it’s one that can pay off nicely for both sides.