Software giant Microsoft Corp. (NASDAQ:MSFT) is set to have a slice of e-book and market via its $300 million investment in a Barnes & Noble, Inc. (NYSE:BKS) unit.
The new subsidiary, referred to as Newco, will bring the digital and College businesses of Barnes & Noble together, which has not yet decided on the name of Newco.
Microsoft, which values the new unit at $1.7 billion, would get 17.6 percent stake in Newco, while the balance 82.4 percent will be held by B&N.
Redmond, Washington-based Microsoft is cementing its base by creating its presence in the Nook platform before the launch of Windows 8, which is expected in the second half of this year. The deal is also a window for Microsoft to make its presence felt in the tablet market dominated by Apple Inc. (NASDAQ:AAPL).
Interestingly, B&N's Nook runs on a modified version of Google's Android operating system and Microsoft also sued B&N for infringing some of its patents in Nook.
However, as the competition intensifies and Apple moves farther ahead in terms of market share with its iPad, it makes sense for Microsoft to partner with a company already established in the tablet market.
Nook has 27 percent of the U.S. e-books market since the device was launched in 2010. A new report by analyst firm Juniper Research forecasts that eReader shipments will reach 67 million by 2016, nearly triple the 25 million devices the company expects to reach the market in 2011.
Both parties ended their patent litigation as B&N and Newco will have a royalty-bearing license under Microsoft's patents for its Nook eReader and Tablet products.
The first benefit from the deal would 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 catalogs of e-Books, magazines and newspapers to hundreds of millions of Windows customers in the U.S. and internationally.
However, the deal would be much more for Microsoft rather than a simple Nook app. In the long-run, Microsoft would infuse its Windows 8 in to the Nook tablet. Windows 8 is designed to run both in PCs and tablets. However, it would be a distant dream given the lead time in development of the OS.
For B&N, the deal is on the lines of its stated strategy splitting its digital business from the retail division. The deal would also give B&N a massive audience for its e-books and a strong partner in Microsoft which has more advertising and marketing muscle with its billions of cash that would help B&N expand its digital business beyond the U.S.
New York-based Barnes & Noble's digital business lost $93.7 million in its third quarter, wider than $50.5 million last year, due to its heavy investments in the digital-books to compete with Amazon.com Inc.'s (NASDAQ:AMZN) Kindle Fire and iPad. Microsoft, which had about $59.5 billion in cash, cash equivalents and short-term securities as of March 31, would give the much-needed cash boost for B&N's digital business.
As part of the deal, B&N and Microsoft would share revenues, net of certain items, from digital content purchased from Newco by customers using Windows 8 applications or through certain Microsoft products and services that may be developed in the future and are designed to interact with the Newco online bookstore.
In addition, Microsoft will make certain nonrefundable advance payments to Newco in connection with such revenue sharing. For each of the first three years after the launch of such application for Windows 8, these advance payments would be equal to $60 million per year.
Microsoft would also pay to Newco $25 million each year for the first five years of the term for purposes of assisting NewCo in acquiring local digital reading content and technology development in the performance of Newco's obligations.