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How Microsoft-Nook Deal Would Hurt Amazon?

 May 01, 2012 07:26 PM

(By Mani) Software giant Microsoft's (NASDAQ:MSFT) $300 million investment in Barnes & Noble, Inc. (NYSE:BKS) unit is a blow to Amazon, Inc. (NASDAQ:AMZN) as the deal would strengthen its key rival in e-book and tablet market.

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.

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The investment would boost B&N's Nook platform, a key rival to Amazon's Kindle e-reader and Kindle Fire tablet.

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. This could be significant as both Kindle Fire and Nook Tablet runs on a modified version of Android Operating System. If Microsoft manages to put a tablet-friendly Windows 8 in to Nook tablet, then it could be a significant sales advantage for B&N.

Amazon has capitalized on the explosive growth in the e-book market by offering digitized versions of its millions of books through its Kindle e-reader, which comes for as low as $79. B&N also offers its cheapest e-reader Nook Simple Touch for $79.

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A new report by analyst firm Juniper Research forecasts that e-reader shipments will reach 67 million by 2016, nearly triple the 25 million devices the company expects to reach the market in 2011. Amazon has over 60 percent of the e-reader market, while Nook has 27 percent of the market.

It appears that Amazon will not be troubled on the e-reader front, but it will surely feel the heat on the tablet front. California-based Amazon is striving hard to become the third player in the tablet market after Apple iPad and other high-end Android tablets from Samsung and Motorola.

Amazon focused on the economy class and launched its Kindle Fire tablet in November 2011 and let users play videos, games, music, and movies on the Internet. Above all, it is offering Kindle Fire at a price point of $199, less than half of an iPad.

Comparatively, Nook tablet comes at the same price point of $199 and roughly offer the same features, including 7-inch screen, and significant access to content, such as books, DVDs and magazines. However, Amazon has an edge over B&N in terms of content.

Nevertheless, Amazon's Kindle Fire share of Android nearly doubled within two months. Amazon Kindle Fire share surged to 54.4 percent in February from 29.4 percent in December last and 41.8 percent in January, a data based on united digital measurement from comScore indicates. Kindle Fire was launched in November 2011, and the current share clearly indicated the amount of adoption among the buyers of tablet PCs.

But, the Nook deal would give B&N a massive audience for its e-books and a strong partner 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.

In addition, there are concerns over Amazon's margins as it is selling for the Kindle Fire at the $199. It's generally believed that Amazon sells the product at breakeven or a loss. Amazon's Kindle Fire carries a bill of materials (BOM) cost of $185.60, according to preliminary findings from the IHS iSuppli Teardown Analysis Service. When manufacturing services expenses are added, the cost increases to $201.70. Thus, Amazon sells each Kindle Fire at a loss of about $3.

As a result, a partnership between Microsoft and B&N could trigger a price war, which would further pressure Amazon's razor-thin margins.

As part of the deal, B&N and Microsoft would share revenues, net of certain items, from digital content purchased from B&N unit, temporarily named as Newco, 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.



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