Microsoft and Barnes & Noble: Will They Blend?
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Despite past legal wrangling over patent issues, it seems that Microsoft (NASDAQ: MSFT) and Barnes and Noble (NYSE: BKS) have managed to kiss and make up. The two companies have struck a deal in which Microsoft will invest $300 million in a new subsidiary focused on the Nook and B&N's college textbooks, similar to the partnership that Microsoft and Nokia (NYSE: NOK) announced last year. B&N stock jumped when the deal was announced, but how well will things work out for the two companies in the long run?
Advantages for Microsoft
Microsoft stands to gain a lot from this deal, receiving 17.6% control of the new subsidiary and will also be provided with a Nook app for its upcoming Windows 8 operating system. This will give Microsoft an easy entry into the modern world of ebook sales with Barnes and Noble's established product line doing most of the work. As Microsoft has never had much success in its experiments with ebooks, partnering with an established company will help it to stay competitive against competitors such as Apple (NASDAQ: AAPL) and its iBooks digital bookstore app that is popular on the iPad and iPhone. Microsoft's partnership with Nokia netted it the Windows Phone 7 smartphone even if the launch was met with a few problems; it's likely that the Barnes and Noble deal was inked with hopes of similar successes in the future. With ebook sales continuing to rise and projections stating that ebooks could constitute as much as 1/3 of book sales within the next few years, the chance for this deal being profitable for Microsoft is great.
Advantages for Barnes and Noble
The deal with Microsoft is very beneficial for Barnes and Noble in the short-term, but the long-term benefit for B&N remains to be seen. The most obvious benefit for the bookseller is a major cash injection to help it compete against Amazon's (NASDAQ: AMZN) market-dominating Kindle ebook reader and the Apple iPad. The potential of having the B&N digital bookstore available via the Nook app on Windows 8 tablets is a big selling point, since the availability of the operating system on tablets has been one of the biggest positive talking points about Windows 8 in recent months. If the Barnes and Noble app is well-supported by Microsoft and becomes popular in Windows 8 it could help B&N's digital bookstore to gain a bit of leverage against the might of Amazon.
Into the Future
For now at least, the partnership between Barnes and Noble and Microsoft is a good one. Each company has something to offer the other, and both companies have something to gain by seeing the Nook succeed since the patent lawsuit between the two was settled with Microsoft earning Nook royalties. Microsoft will bring millions upon millions of potential customers to the Nook platform, while Barnes and Noble will bring a well-known name and potential tie-ins with brick-and-mortar B&N bookstores. Comments by Barnes and Noble CEO William Lynch even hinted that there may already be discussions underway of significant integration of Microsoft technology with future versions of the Nook, though as nothing official along that line has been announced this could be anything from a WindowsRT-powered Nook tablet to a Nook plugin for Word or Publisher that allows for easier publication of papers and ebook titles.
The problem doesn't lie with the now, but instead lies with the future. Opinions are majorly divided on Windows 8 and it remains to be seen whether the new operating system will be a major success for Microsoft or a major flop. Windows tablets are hot discussion items, but if the price isn't right then consumers may not pick up the tablets when they finally hit the market. Likewise, a Windows Nook is an interesting prospect but given scalability and pricing it might be based more on Windows Phone's software than WindowsRT and that might not be enough incentive to get people to pick it over a Kindle.
I own a Nook, and I bought it after checking out Kindles and a few other ebook readers because it provided a better user experience for me. I want to see the Nook continue to evolve and develop, and I think that this deal between Microsoft and B&N will give it a better shot of sticking around for the long haul. Ebooks are going to continue growing as a market, but there's still a lot up in the air as to whether Barnes and Noble and Microsoft will really be able to capitalize on that market. I've owned varying amounts of Microsoft stock over the years because of their continued-if-weakening dominance of the PC market with Windows and Office, but I can't say that this news makes me want to double-down on my investment in expectation of a major price surge. Barnes and Noble is getting more of a boost from the partnership and may be a sound investment in the short term, but investors who get on board now should be mindful of the fact that the boost could very well be a result of B&N's partnering with a more stable company instead of genuine interest in the future of the Nook brand.
John Casteele owns shares of Microsoft. The Motley Fool owns shares of Apple, Amazon.com, and Microsoft. Motley Fool newsletter services recommend Amazon.com, Apple, Microsoft, and Nokia. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
