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B&N Spins Off Nook & B&N College – MS To Invest $300 Million (a Deeper Look)

April 30th, 2012 by · 14 Comments · Barnes & Noble, Microsoft

It looks like B&N found that investor that they’ve been looking for; today they announced that the Nook unit would be combined with B&N college to form a new sub worth about $1.7 billion. Microsoft is investing $300,000,000 and taking a one sixth or so share in the new company. The spinoff will control the Nook development, but B&N will continue to sell it. There will also be a new Windows 8 app.

My first thought was to wonder why did no one want to invest? But there’s more to the story.

This story actually has multiple layers to it that go far beyond the basic news. There are also a number of corollaries which both complicate and make this much more interesting. For example, a little over a month ago one senior Microsoft  manager said that Windows 8 would show up on ereaders. I didn’t think much of the story at the time, but clearly that was a foreshadow of today’s news.

And if you’re thinking that someone should have connected the dots, well, B&N and Microsoft were in the middle of a patent dispute back then. Would you have expected companies fighting in the courtroom to settle this amicably? I didn’t. This new spinoff does settle the lawsuit (that is a detail mentioned in the press release below).

I suppose some one will tell me it’s not unusual to settle a lawsuit this way, but this one is still odd. Microsoft has been a patent troll (towards Android, at least) for some years now. They’ve been extorting money out of Android device makers since late 2010, in fact. Patent trolls got their name because they don’t actually innovate on their patents; they sue. Watching Microsoft switch from troll to investor was a surprise.

One might also argue that Microsoft’s first step in this direction was when they threw in the towel on MSReader, their ebook platform, back in August of 2011. But that would be a bit of a stretch.

I was also surprised to learn that B&N College, which operates some 600 college bookstores, was included in the deal. B&N College is a retail operation. While it does sell the Nook it doesn’t do any real research or development of new products or tech. This makes me wonder both what the new spinoff will be focused on and when exactly was B&N College was added to the deal. I suspect that this happened only after iBooks Author got so much favorable press. If so, it was a foolish move. iBooks Author is more hype than substance. Yes, it’s a nice tool, but the hardware costs are absurd.

On a related note, do you suppose this is a sign that Microsoft plans to let their relationship with Blio cool? MS was one of the early supporters of Blio, so much so that the first public demos of the platform were held at CES 2010 in the MS booth behind closed doors. Okay, that’s not really public but you get my point.

And finally, I wouldn’t read too much into the details about the new Windows 8 app. B&N would have released one anyway. It’s Windows, for crying out loud. They kinda have to release an app.  But if you combine it with the hints from last month it raises the possibility that the next Nook could run on Windows 8. That’s possible, but it will likely be as closed as the current Nooks.

All in all, an interesting morning.

press release:

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.

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14 Comments so far ↓

  • fjtorres

    Uh, watching MS go from “troll” to investor should *not* be a surprise at all.
    It is, in fact, standard MS practice to extend patent licensing negotiations–where both parties open up their IP portfolios to each other–into partnerships and investments. They do it all the time, whether they are being sued or sueing themselves.
    The Apple investment is one prominent example.
    The Immersion rumble-tech lawsuit is another; Immersion sued MS and MS ended up settling and investing in Immersion to help them fund ttheir further lawsuits.
    It’s all about protecting and monetizing your IP resources.

    This new deal makes perfect sense: B&N was running out of cash and the patent lawsuit was a drag on any spinoff or sale so they *had* to get it out of the way before doing anything. Once they got pass their hysterical name calling hissy-fit and got down to brass tacks the synergy of boosting each other’s business became obvious. MS drops some spare change from under the sofa cushions, B&N gets a lifeline and a partner who’ll let Riggio keep running the show.
    What does MS get?
    The Android royalties they wanted.
    An entry point for Win8 into the Academic market.
    Possibly even a client for Win8RT and the Zune services.

    Whats not to like? :)

    B&N acted like grownups for a change and everybody gets back to the serious business of making money.

    • Nate Hoffelder

      If it’s obvious then why didn’t anyone figure it out from the news last month? I don’t recall that anyone put 2 and 2 together.

      • fjtorres

        Because they were all thinking Win8 ereader = MS eink reader.
        Plus the B&N hystrionics had some thinking they were actually serious about going all the way to court. (yeah, right.)

        Tea leaf reading is not an exact science. ;)

    • fjtorres

      Oh, unless we here of any deeper ties, I wouldn’t read too much into Microsoft’s commitment here.
      They are going to bundle the Nook App on Win8 but they already have the Kindle App.
      It is not unheard of for MS to play with multiple content partners (even competitors) on their platforms. On the XBOX they carry both Netflix and Hulu, Vudu and Crackle, among others, even though they compete with their own Zune services.

      MS is at its heart a tools and platforms company; everything they do is to build/support their platforms. So supporting Nook at the expense of Blio or Kindle just isn’t in the cards.

      What I expect is MS will ship Win8 with apps for Nook, Kindle, Kobo, and whatever other local ebookstores are relevant in the various markets.

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  • Darin Marcus

    I belive the dust has not yet settled on this partnership, as a few questions remain:
    - since BN has to pay royalties for its Android Nooks, how many new models will be released?
    - what benefits (if any) can Windows 8 bring to the basic eBook reading Nooks?
    - will B&N become the “default” bookstore for Windows 8 and XBOX the “default” media/game store for (Win8) Nooks? (the Zune brand appears to be on its way out)
    - is the announced Nook app for Windows 8 a traditional Nook reading app or something more?

    My interest in digital readers goes beyond the usual book reading. My first reader was a Nook Color because of the diversity of formats (including PDF, Word, PowerPoint) and, well, color. :-) I also read a few books for free in a nearby BN store, including one on Lightroom, and the photos looked gorgeous (this was in December 2010).

    However, for academic purposes, neither the Nook tablets nor the Kindle Fire are good enough, and this is where I hope this partnership will change the game. The battle for online education (which could well be the future of education) has only just begun. BN has the NookStudy, which is pretty good for today, but not for tomorrow (interactive smart textbooks/courses), and it does not run on any current tablet. It does not run on the Nook Color/Tablet because the screen is too small. Nook textbooks were not available on Nook hardware until several months ago because of the same concerns (this changed when the firmware update allowed the rotation of NookBooks in landscape mode). It could be that the Win8 app in the works is something in the direction of a more advanced NookStudy. I certainly hope so.

    For now I’m using the new iPad for the screen/resolution, but I have to split my reading between several apps because none is complete enough for academic/research work. I hope they release NookStudy for it soon, although in the new context they may focus most of their energy on Win8. By the end of the year there might be one or more Win 8 tablets with good screens and a Nook Study+ running on them, in which case I will re-evaluate my choices.

    • fjtorres

      Since no Microsoft personnel are moving to “Newco” the answers are all up to B&N.
      It is (apparently) up to them to decide what to do and how far to go.

      But *if* they go with Win8RT for a MetroNook they’ll be getting a more robust OS and significantly better software development tools all focused on an HTML5 environment which is something Amazon is already pursuing and B&N hasn’t even hinted at.

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