Microsoft Corp is jumping into the fast-growing e-books market by investing US$605 million over five years in Barnes & Noble Inc’s Nook e-reader and college business, as it looks to unlock Amazon.com and Apple Inc’s grip on the exploding tablet computer market.
The move comes just six months before the world’s largest software maker is due to launch its new touch-enabled Windows 8 operating system, and the inclusion of a Nook app on Windows tablets should allow them to compete with Apple’s iPad and Amazon’s Kindle Fire.
It also gives Microsoft a direct interest in electronic publishing just as the market for downloadable college textbooks starts to take off and the publishing industry undergoes a radical shift toward electronic distribution.
“It’s a good strategic deal,” said Sid Parakh, an analyst at fund firm McAdams Wright Ragen. “It gets Microsoft in the game for e-readers and gives them access to a market that has been growing nicely and they’ve basically sat out of. It also makes Windows 8 a more compelling platform from an e-reader’s perspective.”
In turn, Barnes & Noble gets a much-needed capital injection and a way to enter the digital books market outside the US. The new unit will be run and majority owned by Barnes & Noble and will maintain a relationship with the US bookstore chain’s nearly 700 stores.
Shares of Barnes & Noble soared as much as 90 percent in early trading, before sliding back and ending with a 52 percent gain at US$20.75. Microsoft shares, which recently hit a four-year high, edged up 0.1 percent to close at US$32.015.
Microsoft’s initial investment of US$300 million, which will give it a 17.6 percent stake in the newly created Barnes & Noble subsidiary, values the new unit at US$1.7 billion. Over the next five years, Microsoft has committed to invest another US$305 million.
The deal — initially worth only 0.5 percent of Microsoft’s cash hoard — is financially small, but strategically important for both companies.
“The deal brings Microsoft technology and engineers into the Nook business — that talent will be tapped to make the Nook even better,” said Albert Greco, a book industry expert at the Fordham Graduate School of Business in New York. “It gives Microsoft a tablet already, and Barnes & Noble global reach for the Nook platform, through Windows 8.”
Barnes & Noble chief executive William Lynch said that the investment would go primarily to fund the international rollout of the Nook’s digital bookstores and new reading software for the Windows platform.
Under the deal announced early on Monday, Microsoft will get a 17.6 percent stake in a new Barnes & Noble unit combining the bookseller’s college bookstore and Nook businesses. Those areas made up just over US$1 billion in sales last quarter, about 40 percent of Barnes & Noble’s total.
Microsoft, which will get an unspecified share of the new unit’s sales, will pay US$25 million a year for the first five years to help with development costs and acquiring content, and will make an upfront payment of US$60 million a year for the first three years after the launch of Windows 8, essentially guaranteeing minimum sales of that amount to Barnes & Noble.
That means Microsoft’s total outlay will be at least US$605 million.
As part of the deal, Microsoft has dropped a patent lawsuit against Barnes & Noble over the Nook, which runs on Google’s Android system, and will get royalties on those patents. There is a possibility that future Nook models will be based on the Windows operating system, but executives would not comment on that in a call with analysts.