Microsoft and Barnes & Noble Team Up to Take on Amazon, Apple

By Jeremy Greenfield, Editorial Director, Digital Book World, @JDGsaid

Microsoft and Barnes & Noble are entering into a strategic partnership aimed at shifting the balance of power in the battle for the exploding e-book market with Amazon and Apple.

In a press release this morning, both Microsoft and Barnes & Noble announced a strategic partnership between the software giant and the bookseller’s Nook and college bookstores business. Microsoft will invest $300 million and own a 17.6% stake in the joint venture, valuing the business at $1.7 billion — more than twice as much as Barnes & Nobles’ current market capitalization of $791 million.

Barnes & Noble shares nearly doubled in price to $27.11 in trading before the opening bell, up 99%. Microsoft shares were flat at $32.04. Per Publishers Lunch, shares of Barnes & Noble have settled down since the opening bell and are now at roughly 65% above Friday’s close.

On January 5, Barnes & Noble announced that it would explore strategic alternatives for its Nook device and e-book business.

“Today’s strategic announcement is a step in that direction,” said Barnes & Noble CEO William Lynch.

On a webcast this morning by Barnes & Noble and Microsoft, Lynch called Microsoft an “ideal partner,” with the ability to bring Nook books, magazines and newspapers to “more screens worldwide” than almost any other company.

Although Microsoft’s mobile operating system has insignificant market share compared with Apple’s iOS and Google’s Android, the most popular e-reading device in the U.S. is the PC, according to a recent Pew Internet study. According to a recent study by R.R. Bowker, the most popular e-reading device in the U.S. is the dedicated e-reader, but in other countries around the world like Spain, France, Germany, Japan, India and Brazil, it is still overwhelmingly the PC.

“Barnes & Noble and Microsoft have complementary technology assets,” said Andy Lees, president of Microsoft on the webcast. “We are on the cusp of a digital reading revolution” and “technology will enable people to engage with content in new ways.”

As part of the partnership, a Nook reading application will be included in Windows 8.

The “unique symbiotic relationship” between the Nook platform and Barnes & Noble’s consumer bricks-and-mortar business, wherein the Nook devices are given a showroom in each of the nearly 700 stores, will remain in place, said Lynch.

Barnes & Noble is reportedly the second-leading e-bookseller in the U.S. with a 27% market-share. Amazon is thought to be the market-leader with two-thirds market share. And Apple is considered to be the third-leading e-bookseller in the U.S. with a market share of less than 10%.

With the Department of Justice suing Apple and five of the largest U.S. publishers, alleging an e-book price-fixing scheme, many observers thought the move, which would theoretically allow Amazon to resume deep discounting of some best-selling books, would hurt Barnes & Noble and other e-booksellers, including Apple and Sony, which has a small part of the U.S. e-book market.

Speculation swirled around the leading U.S. bricks-and-mortar bookseller following the Justice Department’s lawsuit. Shares of its stock plunged in the days following the filing of the suit. Jana Partners, a New York-based hedge fund known for event-based investing bought three million shares of Barnes & Noble stock, stabilizing its share price. The firm now has nearly a 12% stake in the bookseller. Its relation to the joint venture is not yet known.

According to two sources familiar with the matter from within Jana, the firm invested in Barnes & Noble because the Nook business was essentially free at the company’s then-current market capitalization. Jana’s writeup on the investment says as much. The investment now seems prescient with Barnes & Noble shares skyrocketing following the announcement of the Microsoft partnership.

As part of the deal, Microsoft will give an advance of $60 million on profits earned through the venture for the first three years of the partnership.

“There’s investment going in by both companies and that investment is to fuel the growth of the Nook bookstore internationally,” said Lees.

On the webcast with investors, Microsoft and Barnes & Noble stressed the education-market focus of the partnership.

Microsoft and Barnes & Noble will collaborate on “management and distribution of online course materials” and will “build a robust platform for digital and physical distribution of course materials, providing schools with unrivaled course management and retail services,” said Lynch.

Apple recently launched iTunes U and iBooks Author, an e-book production tool designed to help easily create highly interactive and engaging e-books and e-textbooks.

Per, this is not the first time that Microsoft has tried to break into the e-book business. As early as 2000, Microsoft was developing PC-based e-book and e-reader technology. In 2005, Microsoft launched MSN Book Search and pledged $5 million to digitize 150,000 books, an effort that was shuttered in 2008.

This is also not the first time in the past six months that a device manufacturer and e-bookseller has teamed up with a larger partner to take on Amazon in the e-book market. Kobo, a Toronto-based device manufacturer and e-bookseller was acquired by Rakuten, the leading e-tailer in Japan in late 2011.

Write to Jeremy Greenfield

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