03 May 2012 12:26:52
Microsoft is challenging Amazon's dominance of the ebook industry with a $300m (£185m) investment in Barnes & Noble's Nook reader and college textbook businesses.
News of the deal sent shares in Barnes & Noble up 76% from $13.68 to $24.09 in US morning trading on Monday, boosting the bookseller's value by almost $900m, from $823m on Friday close to $1.7bn by midday. Microsoft's stock rose 2 cents to $32.
The pair have teamed up to create a subsidiary, provisionally named Newco, which could eventually be spun off. Microsoft will own 17.6% of the equity.
As part of the deal, which ends a number of lawsuits between the two, the software manufacturer will also include a Nook reader application in the next version of Microsoft Windows, to be released in the autumn.
Having a favourable position on the default pages of new Windows computers is likely to give Nook a major boost, say analysts. "It gives them a much larger partner with deeper pockets, it gives them increased reach," said Peter Wahlstrom at Morningstar. "In the last two years they've had their backs against the wall."
The agreement gives Barnes & Noble ammunition to fend off shareholders who have been urging the bookseller to sell the Nook business – or even the entire company. It will also ease concerns that Barnes & Noble lacks the capital to compete with the ebook industry's market leader, Amazon Kindle. However, the Nook is likely to struggle to seriously challenge Amazon's estimated 60% of the ebook market.
For Microsoft, the investment means it will own a stake in a company that sells tablet computers based on Google's Android mobile software – one of the main competitors of Windows Phone, Microsoft's smartphone software. There is a Nook application for Windows PCs, but none for Windows Phone devices.
William Lynch, Barnes & Noble's chief executive, said Nook software will continue to be available on devices such as the iPhone, which competes with Windows Phone.
Barnes & Noble has had some success with its e-book sales and Nook e-readers, which are estimated to account for 25% of the US ebook market. One key area it dominates is university textbooks, with its Nook Study offering.
Microsoft has a long-standing interest in ebooks, having launched the software in 2000. However it was never able to build a substantial library and is discontinuing its product on 30 August.
Barnes & Noble has 691 bookstores in 50 states and the subsidiary company will have an ongoing relationship with the bookseller's stores. Michael Norris, an analyst at Simba Information, said: "The whole reason the Nook business is expanding so rapidly is because bookstores are committed to it and know how to market the product in that environment."
Speculation has circled recently about a possible separation of Barnes & Noble's digital and college businesses. In March, G Asset Management, a private investment firm and Barnes & Noble shareholder, offered $460m for a 51% stake in the company's college bookstore unit, Barnes & Noble College Booksellers LLC.
Under that plan the unit would begin as a private business but become public within a "reasonable" amount of time. G Asset's offer was contingent upon Barnes & Noble keeping current management in place and divesting its Nook e-business. At the time the offer was made, Barnes & Noble declined to comment.
