Possibilities Abound in Microsoft, Barnes & Noble Deal

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

Imagine a Windows-powered Nook tablet that breaks the iOS and Android stranglehold on the mobile device market.

Imagine turning a Power Point slide deck into an enhanced e-book and distributing it to a dozen e-booksellers with the press of a button.

Imagine a book discovery engine built into every version of Internet Explorer and connected to one of the world’s leading e-bookstores.

These are the dreams that book industry players were having last night as the news sunk in of a sweeping new partnership between tech giant Microsoft and the second-leading U.S. e-bookseller, Barnes & Noble. The $605 million deal sent Barnes & Noble stock soaring (up 99% at one point, closing up 50%) and speculation flying about what the new deal could mean for both companies and for the e-book industry as a whole.

With nearly $60 billion in cash reserves, 350 million Windows 7 users and an army of developers and technologists, Microsoft seems an ideal partner for any venture requiring money, distribution and technology.

Enter the second-leading e-bookseller in the U.S., Barnes & Noble. The company has seen success in the e-book business, building a reported 27% market share and a thriving tablet and e-reader business in just a few years. Still, by most accounts, the leading U.S. bricks-and-mortar bookseller has been struggling to compete with Amazon, a $48 billion behemoth with a reported two-thirds market share in e-books and a history of using business tactics that leave consumers happy and competitors beaten.

Industry observers feel that this deal changes the balance of power in the e-book industry overnight.

“The world of e-book publishing and e-book retailing just changed today,” said Mark Coker, founder and CEO of Los Gatos, Calif.-based Smashwords, one of the largest distributors of self-published e-books in the world. “There’s been a lot of speculation about what would happen to Barnes & Noble, and I think that speculation can go to rest now.”

Others echoed this sentiment.

“It changes the landscape completely,” said Mike Shatzkin, a publishing industry consultant (and, full disclosure, partner with Digital Book World on the Digital Book World Conference in January). “If you’re a publisher, getting three or four years of healthy competition to the one account that scares you, that’s a pretty good day.”

Now that the deal is done, what are some of the possibilities for the new partnership?

 

Search and Discovery Partnerships

One issue confronting e-book publishers in the absence of physical bookshelves and a front-table is, “how do I get my books discovered online?”

Barnes & Noble and Microsoft could take aim at that problem in a number of ways. The new venture already has plans to do so. The only part of its business road-map that the company would discuss was that Windows 8 will have a dedicated Barnes & Noble app.

“Imagine if Microsoft were to add some integration on the Windows browser powered by Barnes & Noble,” said Coker. “Imagine if they partnered in some way with the Microsoft Bing search engine.”

Microsoft also owns a share of the mobile phone operating system market through its partnership with Nokia and about 40 million subscribers for its Xbox live gaming platform.

Forrester books analyst James McQuivey speculated that a Windows-powered iTunes-like store is in the offing.

“Making an iTunes-rival is something Microsoft has to do anyway,” he said. “This is the only move they’ve made that suggests they’re able to do this. They need books, movies, music and apps.”

 

New E-Book Publishing Tools

With its Microsoft Office suite of tools (MS Word, Power Point, Excel, to name a few), Microsoft is one of the leading sellers of publishing technology in the world. With its connection to a viable e-bookseller, one could imagine new “publish as e-book” functionality embedded into those tools.

During the investor conference call yesterday, Microsoft president Andy Lees alluded to the company’s content creation tools and said, “We think we’re going to have a larger role to play than just being the platform provider.”

“What would be very interesting if they could now move their office suite along so it automatically exports stuff for full publication — now that would certainly be something to watch,” said Maryn Daniels, a London-based publishing-industry veteran and founder of Opus 57, a consultancy.

Microsoft beat reporter for ZDnet Mary-Jo Foley speculated yesterday that, “We haven’t seen or heard much from Microsoft on the content creation/publishing side of e-books, at least so far.”

 

A Microsoft-Powered Nook Tablet

Reviewers have crooned over the Android-powered Nook tablet but the device has yet to make cash registers sing the same tune. Apple and Amazon currently own the U.S. tablet market, with the former taking about 60% with the iPad by some reports and the latter owning about 50% of the rest with the Kindle Fire.

Microsoft, of course, has basically no presence in the tablet market, especially since its Courier tablet effort fizzled in 2010.

“They want to get into the tablet business,” said McQuivey. “There’s going to be a Nook Windows tablet and I think it’s going to be ten inches. I don’t think the next version of Nook gets upgraded with Microsoft technology. It doesn’t’ need to be soon, but it will happen.”

Aside from a head-start with a proven device, Barnes & Noble offers Microsoft another advantage in the tablet business: a good relationship with developers. Microsoft has had a tortured relationship with the app developers who build the app ecosystems that have made iOS and Android devices such a hit.

“The really big problem for Windows is the developer community,” said McQuivey. “Developers are having a hard time spending time developing for Android let alone Windows. One of the benefits for Microsoft is that Barnes & Noble has cultivated some good relationships with developers.”

 

A Microsoft Store Inside Barnes & Noble

Barnes & Noble has long-touted its Nook device stores inside of Barnes & Noble shops as being a distinct advantage over rivals in the tablet and e-reader wars. With nearly 700 stores blanketing the U.S. (and nearly as many college stores), Barnes & Noble can offer Microsoft products an attractive, proprietary bricks-and-mortar presence.

While the new venture, dubbed NewCo for now, only includes the Nook and the Barnes & Noble college bookstore business, Barnes & Noble CEO William Lynch said on yesterday’s conference call that the Nook would continue to enjoy the special relationship it has with Barnes & Noble consumer stores.

“Barnes & Noble retail stores and the Nook digital platform have a unique, symbiotic relationship,” said Lynch. He added that the company had no immediate plans to sell Microsoft products in its stores but that the possibility existed.

“In the last month, Barnes & Noble removed more bookshelves from its stores and put in more room for games and other things. Well, why not start selling Microsoft Xbox gaming systems?” said Coker.

 

Revitalization of Barnes & Noble Stores

The Nook business lost $200 million last year and is set to lose $260 million this year, say analysts who spoke with Dow Jones Newswires. With its profitable bricks-and-mortar businesses, Barnes & Noble has been subsidizing the growing Nook business.

“The bricks and mortar stores have been subsidizing the Nook,” said Shatzkin. “They’re not going to have to do that anymore. By investing in the Nook and removing the need for Barnes & Noble to divert cash flow to e-books, they have helped the bricks-and-mortar stores.”

What Barnes & Noble does with that cash is as yet unknown.

 

International Expansion

While Amazon and Kobo have a head start in the international e-book market, the $25 million a year of promised investment in international expansion by Microsoft could help close that gap for Barnes & Noble.

The company has already made announcements about a launch in the UK and there have been rumblings elsewhere of the coming of the Nook.

“If they start to do around the world what they do in the States in terms of market share, they’ll be a very significant player,” said Shatzkin. “If it developed over time that Amazon had 40%-to-50% of the global e-book market, and Apple, Barnes & Noble and Kobo divide the rest, they all can be making a lot of money.”

 

But What If It Goes Poorly

To be sure, Microsoft has been down this path before and those ventures aren’t going well to date.

From Dow Jones Newswires: “Bing search engine and partner Yahoo Inc. have captured nearly one-third of the Internet search market, but Microsoft’s online services business still lost $479 million last quarter. Nokia, its premier partner for Windows Phone, sold more than 2 million Lumia smartphones, but last quarter it still reported a $1.2 billion net loss.”

What may happen with NewCo is still to be determined.

“But we don’t know yet what will happen,” said McQuivey. “We don’t even know what the thing’s called, much less what the specifics are.”

Write to Jeremy Greenfield

Crystal ball image via Shutterstock

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4 thoughts on “Possibilities Abound in Microsoft, Barnes & Noble Deal

  1. Very nice roundup. One piece of it I don’t quite get is why the spin-off of Nook and BN’s eCommerce is good for the physical bookstores. Though the stores no long have to subsidized the market expansion of the Nook, their core value–of selling physical things, mostly print books–is going down. More capital doesn’t help them much to fight the trend of retail shifting online. But, maybe I’m missing something.

    • That’s a good question.

      I think there are many possible answers. I’ll try to offer two:

      1. Not having to sink $$ into an investment every year opens up possibilities for B&N on how that money can be put to work: More salespeople (which has been shown to increase sales many times investment in retail stores); marketing; and store redesign are just three that come to mind. Any business, even one that is presumably in decline, can use extra capital to try to increase revenue.

      2. B&N has been decreasing bookshelf space in an effort to maintain sales and improve margins in an environment where fewer people are buying print books from bricks-and-mortar stores. Forrester analyst James McQuivey told us in April, when the DoJ suit was filed, that Barnes & Noble had to turn into a lifestyle retailer to continue to stay relevant. If that is indeed the direction the business is going in, that transition will take a lot of capital in new kinds of staff, re-branding, store redesigns and all sorts of other things.

      Hope this helps!

  2. You failed to mention what I think would likely be the most promising Microsoft/Barnes & Noble co-venture: a tablet customized for textbooks.

    I know: textbooks aren’t sexy. But Amazon doesn’t seem to care much about eTextbooks or readers (I believe response to the Kindle DX has been underwhelming among students and educators) and Apple, which has worked harder than Amazon on textbook publishing tools (for the iPad, of course) is likely focused on iPad adoptions and not much else. BN.com has already developed textbook reading software that could probably be ported fairly easily to a larger-size Nook tablet. Getting textbook publishers like Pearson or McGraw-Hill on board would be easier if they were convinced Microsoft had some serious skin in the game. And, of course, there are all those Barnes & Noble college bookstores just waiting to stock hardware and software for the coming semester.

    The unknown here is Microsoft. Does it get what it’s doing with B&N or was it just one more $600 million deal somebody came up with over a weekend and thought would be visionary and cool? (I’m still wondering what they plan to do with Skype — and they paid a lot more for *that* technology.)

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