Microsoft Makes $300M Investment In New Barnes & Noble Subsidiary To Battle With Amazon And Apple In E-books

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Barnes & Noble has found a new, major partner in its fight to get an edge over Amazon and Apple in the market for e-books and the devices being used to consume them: it is teaming up with Microsoft in what the two are calling a strategic partnership, name yet to be determined.

It will come in the form of a new subsidiary of B&N that will include all of its Nook business as well as its educational College business. Microsoft is making a $300 million investment in the subsidiary, valuing the company at $1.7 billion in exchange for around 17.6 percent equity in the subsidiary.

The news leaves the door open for B&N to eventually spin these off into a separate business altogether — or even sell them to Microsoft. And it leaves a load of questions about what B&N will do next with the Nook, which is currently built on a forked version of Google’s Android platform.

The new company, referred to for the moment as Newco, will contain B&N’s digital business, as well as its College division. While Microsoft will take 17.6 percent, B&N will own 82.4 percent of the venture.

This is a key way of getting more content on to the Microsoft platform — specifically e-books content to ensure that its Windows 8 tablets will be able to compete not only against the best-selling iPad but also the Kindle Fire from Amazon, along with the rest of the company’s e-readers. The Kindle Fire has stolen a march among Android tablet makers and part of the compelling offer is not only the low price ($199) but also the fact that it contains so much content, including seamless access to all of Amazon’s e-book offerings.

This is also a progression — a very big one — of the funding etudes that Microsoft has been making to developers to make sure they are making apps for Windows Phone. It’s a way of getting more content on its two mobile platforms — which, it can be argued, may have come too late to the market. The first product to come out of the door of Newco? A Nook application for Windows 8, the companies say.

And given that education has been one of Apple’s bigger pushes this year, and the obvious and close links between education and e-reading, it’s not too surprising to see that B&N has also put its College division into this subsidiary.

Microsoft, too, has been courting the education market — inking its biggest-ever cloud-services deal in the education sector earlier this month. Nevertheless the pair have a long road ahead of them. In January, Apple noted that there were already 20,000 educational apps for iOS and that there were already 1.5 million devices deployed in schools, numbers that will inevitably have grown in the last 4-5 months with the launch of the new iPad and numerous initiatives to spread the tablet in the educational sector.

And there is a legal twist to the deal, too: the two companies say they have definitely sorted out their patent litigation now: “Moving forward, Barnes & Noble and Newco will have a royalty-bearing license under Microsoft’s patents for its NOOK eReader and Tablet products,” the two write in the release below. If Microsoft doesn’t use this as an opportunity of possibly persuading B&N to swap over to Windows 8 for a version of the Nook, it will also give it a very interesting inroad into developing more for Android.

As for B&N and the future of these products… this deal looks like it could potentially pave the way for B&N to spin off this business into its own standalone operation, if not into the waiting arms of Microsoft itself — long speculated to be looking at ways of gaining a stronger foothold in the area of mobile devices to better implement its bigger strategy. The idea of a subsidiary was something that B&N had first floated back in January, when it noted that it was weighing up how best to separate its digital business to “maximize shareholder value.”

There are many more questions — such as what this could mean for the company’s broader strategy for growing the market for the Nook (international being a key push that the company has yet to make, apart from some baby steps); and how well, exactly, those products are doing for the company: IDC puts the Nook’s share of the tablet market at just 3.5 percent.

The company is holding a conference call on the deal later today and we’ll update as we learn more. Update: A follow up post with details from the 8-K filed by B&N (including details on payouts from Microsoft), as well as highlights from the conference call is here.

Full press release below.

New York, NY and Redmond, WA (April 30, 2012) – Barnes & Noble Inc. (NYSE: BKS) and Microsoft (NASDAQ: MSFT) today announced the formation of a strategic partnership in a new Barnes & Noble subsidiary, which will build upon the history of strong innovation in digital reading technologies from both companies. The partnership will accelerate the transition to e-reading, which is revolutionizing the way people consume, create, share and enjoy digital content.

The new subsidiary, referred to in this release as Newco, will bring together the digital and College businesses of Barnes & Noble. Microsoft will make a $300 million investment in Newco at a post-money valuation of $1.7 billion in exchange for an approximately 17.6% equity stake. Barnes & Noble will own approximately 82.4% of the new subsidiary, which will have an ongoing relationship with the company’s retail stores. Barnes & Noble has not yet decided on the name of Newco.

One of the first benefits for customers will be a NOOK application for Windows 8, which will extend the reach of Barnes & Noble’s digital bookstore by providing one of the world’s largest digital catalogues of e-Books, magazines and newspapers to hundreds of millions of Windows customers in the U.S. and internationally.

The inclusion of Barnes & Noble’s College business is an important component of Newco’s strategic vision. Through the newly formed Newco, Barnes & Noble’s industry leading NOOK Study software will provide students and educators the preeminent technology platform for the distribution and management of digital education materials in the market.

“The formation of Newco and our relationship with Microsoft are important parts of our strategy to capitalize on the rapid growth of the NOOK business, and to solidify our position as a leader in the exploding market for digital content in the consumer and education segments,” said William Lynch, CEO of Barnes & Noble. “Microsoft’s investment in Newco, and our exciting collaboration to bring world-class digital reading technologies and content to the Windows platform and its hundreds of millions of users, will allow us to significantly expand the business.”

“The shift to digital is putting the world’s libraries and newsstands in the palm of every person’s hand, and is the beginning of a journey that will impact how people read, interact with, and enjoy new forms of content,” said Andy Lees, President at Microsoft. “Our complementary assets will accelerate e-reading innovation across a broad range of Windows devices, enabling people to not just read stories, but to be part of them. We’re at the cusp of a revolution in reading.”

Barnes & Noble and Microsoft have settled their patent litigation, and moving forward, Barnes & Noble and Newco will have a royalty-bearing license under Microsoft’s patents for its NOOK eReader and Tablet products. This paves the way for both companies to collaborate and reach a broader set of customers.

Newco,

On January 5, Barnes & Noble announced that it was exploring the strategic separation of its digital business in order to maximize shareholder value. Barnes & Noble is actively engaged in the formation of Newco, which will include Barnes & Noble’s digital and College businesses. The company intends to explore all alternatives for how a strategic separation of Newco may occur. There can be no assurance that the review will result in a strategic separation or the creation of a stand-alone public company, and there is no set timetable for this review. Barnes & Noble does not intend to comment further regarding the review unless and until a decision is made.

Additional information will be contained in a Current Report on Form 8-K to be filed by Barnes & Noble.

Barnes & Noble and Microsoft will host an investor call and webcast beginning at 8:30 A.M. ET on Monday, April 30, 2012. To join the webcast, please visit: www.barnesandnobleinc.com/webcasts.