Redmond, Washington -- In a novel turn of events, software monopolists Microsoft Corp is jumping into the highly booming e-books market by investing $300 million in a new Barnes & Noble subsidiary, giving it a 17.6 percent equity stake in the company. The Nook digital bookstore will be bundled with Windows 8.
According to the press release, the companies revealed today that Microsoft has invested $300 million into a new Barnes & Noble subsidiary, known as Newco until the company finds a suitable name. The $300 million investment will give Microsoft a 17.6 percent equity stake in the firm. Barnes & Noble, which assumed a $1.7 billion valuation on the subsidiary, will retain 82.4 percent ownership.
Overall, the move comes just six months before the world's humongous software maker is due to launch its new touch-enabled Windows 8 operating system, and the inclusion of a Nook app on Windows tablets should allow them to compete with Apple's iPad and Amazon's Kindle Fire.
The move also confers Microsoft with direct interest in electronic publishing just as the market for downloadable college textbooks starts to take off and the publishing industry undergoes a radical shift toward electronic distribution.
“It is a good decisive deal,” said Sid Parakh, an analyst at fund firm McAdams Wright Ragen. “It gets Microsoft in the competition for e-readers, and gives them access to a market that has been growing nicely and they have basically sat out of. It also makes Windows 8 a more compelling platform from an e-readers perspective.”
Besides, Barnes & Noble harvested a much-needed capital injection and a way to enter the digital books market outside the United States. The new unit will be run and majority owned by Barnes & Noble and will maintain a relationship with the U.S. bookstore chain's nearly 700 stores.
The new Nook Tablet is seen during a demonstration at the Union Square Barnes & Noble in New York, in this November 7, 2011, file photo. Credit: REUTERS/Shannon Stapleton/Files
In addition, the Android-based e-readers have been profitable for the bookseller, but they have struggled in their fight against Amazon's Kindle line, especially now that the Kindle Fire reportedly owns half the U.S. Android tablet market. Microsoft's purchase will put a form of Nook into Windows 8.
The two companies will partner in a new Barnes & Noble subsidiary which will push further into the education market. Barnes & Noble's digital and college businesses, indicating the retailer's Nook operations and its Nook Study software for students and educators will be a part of the venture. 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. Additionally, the companies have reconciled all of their patent litigation related to use of Android on the Nook tablet, and have formed a “royalty-bearing license under Microsoft's patents for its Nook e-reader and Tablet products.”
“The deal brings Microsoft technology and engineers into the Nook business - that talent will be tapped to make the Nook even better,” said Albert Greco, a book industry expert at the business school of Fordham University in New York. “It empowers Microsoft a tablet already, and Barnes & Noble global reach for the Nook platform, through Windows 8.”
Barnes & Noble Chief Executive William Lynch speaking to Reuters said that the investment would go primarily to fund the international rollout of the Nook's digital bookstores and new reading software for the Windows platform.
However, the partnership between Microsoft and Barnes & Noble is a rather strange one. For over a year, the companies have been battling in the courts, with the software giant accusing Barnes & Noble of patent infringement. Barnes & Noble has responded with venom, saying that Microsoft was misusing patent law for its gain, and last year went as far as asking the Justice Department to investigate the Windows maker.
“It gives them a much bigger partner with deeper pockets, it gives them increased reach,” said Morningstar analyst Peter Wahlstrom. “In the last two years they have had their backs against the wall.”
Nevertheless, Barnes & Noble investors could not be more pleased. The company's shares soared up to a whopping 83 percent to $25 in pre-market trading.