Sunday, December 21, 2014 10:39am CST

Microsoft Invests In Barnes And Noble

April 30 2012 by Kerry Kobashi

barnes and noble logo
Barnes & Noble has raise funds for a new digital hardware venture temporarily named Newco. Microsoft, the Redmond, Washington software giant has seeded the company with a $300 million investment.

Microsoft's 17.6% stake values Newco at nearly $1.7 billion. News of the announcement sent Barnes and Noble (BKS) stock soaring to finish up some 51% on the day bolstered by heavy trading volume.

The new subsidiary is a strategic partnership to promote e-Reading with Barnes & Noble's NOOK. The first product will be a Windows 8 application that will let users download books, magazines, and newspapers from their digital bookstore to be read on desktop computers.

Included in the deal is Barnes and Noble's College division that produces software for the NOOK to let students and teachers create and distribute educational content. Part of Barnes and Noble's long term business strategy is to someday split off Newco as a public company.

Last year Microsoft went on a patent and intellectual rights campaign suing companies in the Android OS space. One of them was Barnes and Noble who uses Android in the NOOK. Microsoft alleged that the NOOK infringed on several Microsoft patents, in particular in areas of tabbed navigation and other user interface claims.

Microsoft, who sees Android devices such as the NOOK threatening its Windows mobile space, wanted BKS to pay licensing fees. This latest partnership can be seen as a cooperative agreement to put aside patent litigation to focus on using each company's technologies together.

That Barnes and Noble is contemplating a spin off of their business is an interesting proposal. Currently, the company operates under three business segments:

  1. BN.com - the online book store
  2. Barnes & Noble Retail - 691+ brick and mortar retail stores
  3. Barnes & Noble College - 640+ college stores selling textbooks and course materials

The retail and college divisions continue to operate at a profit while the online business struggles.
BKS operations chart  January 2012

The bulk of sales come from the Retail segment contributing 61% of it's revenue.
BKS sales chart January 2012

Barnes & Noble does not report NOOK sales as a separate component. As such, it is difficult to tell just how much real value is built up from digital content and NOOK hardware sales. Barnes and Noble is finding itself in the thick of its most challenging periods in its company history. As Apple and Amazon attack the college digital textbook markets through their own tablet offerings, BKS must respond.

Microsoft on the other hand is seeing the digital tablet market expanding, moving its user base away from the PC desktop. With Windows Phone sales lagging against iPhone and Android, the company will continue to struggle against the smartphone crowd.

About Kerry Kobashi

Kerry Kobashi picture

Kerry is the founder of KerryOnWorld. He lives in Silicon Valley.