April 30, 2012, 10:55 AM

Microsoft invests $300 million in the Nook

The capital goes into a newly formed Barnes & Noble subsidiary.

Lead Photo

The Nook.

Microsoft Corp. is investing $300 million in a newly formed Barnes & Noble Inc. subsidiary that will contain the bookseller’s e-book business and college bookstore unit, the companies announced today.

With the investment in the subsidiary company, temporarily being called Newco until it’s formally named, Microsoft also will preload a Nook application in the next version of its computer operating system, Windows 8, which is scheduled to begin rolling out this summer. The inclusion of a Nook app in Windows 8 will extend the reach of Barnes & Noble’s digital content to Windows users around the world, the companies say.  

“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,” says William Lynch, CEO of Barnes & Noble.

Barnes & Noble owns 82.4% of the subsidiary; Microsoft owns a 17.6% stake. Barnes & Noble says it is exploring all its options as to whether it will retain the new business unit as a subsidiary or spin it off into a stand-alone company. Barnes & Noble said in January that it might spin off the Nook into a separate company.

Investors have put pressure on Barnes & Noble to separate its Nook digital business from its store business. Barnes & Noble operates 691 full-line bookstores in 50 states, down from 720 in 2010. Nook sales, which include e-readers, digital content and related accessories, grew year over year about 38% to $542 million from $393 million during the bookseller’s third quarter ended Jan. 28, the retailer says. BarnesandNoble.com Inc. is No. 41 in Internet Retailer’s Top 500 Guide. Microsoft Corp. is No. 68.

Illustrating investors’ differing view of the prospects for selling printed volumes versus e-books, the new company formed around the Nook is valued at $1.7 billion, just over twice the value the stock market is currently attributing to Barnes & Noble as a whole.

Barnes & Noble claims to have a 27% share of the e-book market. Its major competitors are Amazon.com Inc. (No. 1) and Apple Inc. (No. 3). 

The companies say the new subsidiary will also provide the technology platform to distribute digital education materials through the College unit operated by the bookseller. “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,” Lynch says.

The companies also say they’ve settled their recent patent dispute, in which Microsoft in March 2011 sued the bookseller for patent infringement related to the Nook e-reader and tablet devices’ use of Google Inc.’s Android operating system. Going forward, Barnes & Noble and the new subsidiary will have a royalty-bearing license for use of Microsoft’s patented technology in its Nook products. Current Nook e-reader devices operate on the Android operating system. It is unclear whether future versions of the Nook e-reader will operate on Microsoft’s Windows operating system.

The investment comes as consumers rapidly make the conversion from print to digital products. In February, one in five U.S. adults (21%) said they’d read a digital book in the last year, according to Pew Internet Research Center, up from 17% who said the same just two months earlier.

Barnes & Noble’s Lynch will deliver the keynote address at the Internet Retailer Conference & Exhibition in Chicago this June. 

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