With Microsoft's $300 million investment, the two companies are teaming up to create a subsidiary for Barnes & Noble's eBook and college textbook businesses.
Books and bits united April 30 as Microsoft provided an infusion of money to help Barnes & Noble compete with top electronic bookseller Amazon. In exchange, Microsoft gets a long-desired foothold in the business of eBooks and college textbooks.
With Microsoft Corp.’s $300 million investment, the two companies are teaming up to create a subsidiary for Barnes & Noble’s eBook and college textbook businesses. Microsoft is taking a 17.6 percent stake in the venture.
The agreement underscores the importance of electronic bookstores as traditional booksellers and technology companies jockey for position in the increasingly competitive market. While no definitive numbers exist, eBooks are believed to account for some 20 percent of book sales in the U.S.
For Microsoft, the investment is a way to get back into the eBook business. It has dabbled in the field since at least 2000, but never developed much traction. It was Amazon that blew the market open with the 2007 launch of the Kindle, creating a potent challenge to Barnes & Noble’s brick-and-mortar bookstores.
Major Microsoft competitors Apple and Google now have their own eBook stores. All three companies are building businesses that encompass hardware, software, and content in an “ecosystem,” and eBooks and readers are part of the puzzle.
With that perspective, the deal is very important, said Walter Pritchard, an analyst with Citigroup. But he doesn’t expect any near-term financial impact from the deal, noting that even if the Microsoft-Barnes & Noble venture is successful, it leaves the Nook a distant second in the eReader market, behind the Kindle.
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The deal gives Barnes & Noble ammunition to fend off shareholders who have agitated for a sale of the Nook eBook business or the whole company, but the companies said they are exploring separating the subsidiary, provisionally dubbed “Newco,” entirely from Barnes & Noble. That could mean a stock offering, sale, or other deal.
The deal also puts to rest concerns that Barnes & Noble doesn’t have the capital to compete in the eBook business with market leader Amazon.com Inc. and its Kindle, said analyst David Strasser at Janney Capital.
Barnes & Noble Inc.’s stock zoomed up $7.07, or 52 percent, to close trading at $20.75. The opening price of $26 was a three-year high. Microsoft’s stock rose 4 cents to $32.
The investment also means that Microsoft will own part of a company that sells tablet computers based on Google Inc.’s Android, one of the main competitors of Windows Phone 7, Microsoft’s smart phone software.
Microsoft also said the deal means that there will be a Nook application for Windows 8 tablets, set to be released this fall. The app is likely to get a favored position on Windows 8 screens.