Microsoft and the Nook Take on Amazon
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Earlier this year Microsoft (NASDAQ: MSFT) announced its intention to invest three hundred million dollars into a joint venture with Barnes & Noble (NYSE: BKS). This investment would give Microsoft a 17.6% stake in a joint venture that would include the Nook e-readers and Barnes & Noble’s 600 plus college bookstores. Nook e-reader and Nook related sales reached 920 million dollars in the fourth quarter of 2011 and are growing rapidly. According to Barnes & Noble, the Nook has 13.4% of the global market for E-readers, and no doubt higher in the United States. Barnes & Noble has kept the Nook competitively priced to the Amazon (NASDAQ: AMZN) Kindle line with both their Nook E-readers and the Nook Android based tablet. Barnes & Noble has also not turned a profit in recent quarters as their traditional bookstore business slips and the margins on their Nook sales are squeezed out of existence. This Microsoft deal is both a good deal for Barnes & Noble and a good long term bet for Microsoft.
The cash cows that Microsoft has in Windows, Office and its enterprise offerings have resulted in Microsoft sitting on close to sixty billion dollars in cash and short term investments, Microsoft is using this cash to diversify and strengthen divisions of the company that are not so successful. Microsoft struck a billion dollar deal with Nokia that saw Nokia dropping its own smartphone operating system and instead making Windows Phone based smartphones. This deal was designed to boost Windows Phones success, we have yet to see if this will play out because the first line of Nokia built Windows Phones have only recently rolled out. Microsoft also signed a long term deal for their search engine Bing to power Yahoo search results, boosting the initial exposure and traffic of their new search engine and algorithm. Additionally Microsoft purchased a stake in Facebook, long before Facebook went public, and has plans to integrated Facebook into Bing search results. Microsoft purchased Skype for 8.5 billion dollars in 2011 their largest single acquisition, after rumors swirled that other tech companies like Google were interested in acquiring Skype. Facebook has now integrated Skype into its site as its video chat service. All of these moves are designed to diversify Microsofts business, though most of them have yet to bear fruit.
After all of these attempted diversifications Microsoft still receives more than 85% of its income from Windows and Office related products and services. However Microsoft has the money and the time to play the long game, as they are with their Nokia deal, Yahoo deal and Facebook and Skype deals/integration. Microsoft played it long with the Xbox and has seen profits in recent years from the Xbox, they are now looking to boost their Xbox success by turning the Xbox into an entertainment device and releasing a new version of the Xbox within a year.
This deal with Barnes & Noble, gains Microsoft a major player in the e-book market, Barnes & Noble sells an estimated 27% of all eBooks (Amazon sells 60%) and one report by Strategy Analytics estimated that the Kindle Fire and Nook Tablet make up a combined 40% of all Android tablet sales. Microsoft also gets a foothold in the college text book market, which Barnes & Noble just acquired a few years ago for half a billion dollars. As millions of college students buy expensive textbooks every semester and these textbooks evolve to digital and multimedia formats, Microsoft could showcase their products and services though these new types of textbooks thus getting a college educated audience further entrenched in their offerings. Microsoft could further integrate Barnes & Noble’s eBook library into Windows Phone and in the future there is potential for a Windows RT based Nook tablet.
Barnes & Noble has seen traditional books sales slide, and one of its largest competitors Borders went bust because of sliding traditional book sales. Unfortunately Barnes & Noble doesn’t have the cash to both maintain their brick and mortar business and do the heavy investing that is needed to keep the Nook line competitive with Amazon’s Kindle line and the torrent of other cheap android based tablets. Amazon is selling the Kindle Fire at cost or slightly below cost and they are also constantly lowering the price for a basic Kindle E-reader, the Nook will be able to continue this price war with the Microsoft deal and the goal is that once you buy a Nook tablet you will buy digital goods like books that Barnes & Noble gets a cut of. Additionally Barnes & Noble faces Amazon as a competitor in a more traditional business, book sales, Amazon started out as an online book seller and they continue to sell virtually every book at very competitive prices. Barnes & Nobles will be able to focus on in store atmosphere and in store book selection in an attempt to give them an edge over Amazon’s online bookstore.
This infusion of cash from Microsoft and longer term partnership will buy Barnes & Noble time with shareholders so that Barnes & Noble can evaluate what to do to keep their bookstores profitable, perhaps by selling more toys or non-book products. While the Nook line gets the proper investment and the Nook App on windows phone becomes the premier eBook provider. The details about the spinoff of the college bookstores and Nook business units, into a subsidiary, referred to as Newco, are still trickling out but at this point the deal looks like a good move for both Microsoft and Barnes & Noble.
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