Barnes and Noble Should Find a Nook in Windows
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Barnes and Noble (NYSE: BKS) announced on Monday that there will be a new Nook-centric subsidiary and its getting a $300 million investment from Microsoft (NASDAQ: MSFT). The investment will give Microsoft 17.6 percent ownership in the as-yet-unnamed subsidiary (nicknamed “NewCo” in the 8-K filing) with Barnes and Noble retaining the rest. Microsoft’s revenue share wasn’t specified in the filing.
The agreement ends the patent litigations between the two companies and help Barnes and Noble stay in its battle against Amazon (NASDAQ: AMZN). Plans for the subsidiary are rather vague at this point. International expansion is a priority, since it’s currently nonexistent, and Microsoft will pony up $25 million per year for five years to help with this expansion. A previously announced UK launch wasn’t mentioned during the London Book Fair.
It’s the planned Windows adoptions that point towards the best future for this project. There will be a new Nook app for Windows 8, the forthcoming operating system from Microsoft that’s meant to bridge the mobile-PC divide. There are already Nook apps for PC, Mac, iOS, and Android so the Windows 8 version will assumedly contain shiny new features. NewCo will also use the Windows Phone Marketplace for its in-app commerce transactions.
But instead of inching towards Windows, Barnes and Noble should take a leap.
Move from Android?
As I’ve previously discussed, the Nook is just barely hanging in there on market share. According to an IDC report in March, the Nook had 3.5 percent global market share in 3Q11, down 1 percent from the previous quarter. The Kindle Fire, in contrast, had 16.8 percent, putting it in second place only to the iPad from Apple (NASDAQ: AAPL). The Fire and Nook both run modified versions of Android, the open source operating system from Google (NASDAQ: GOOG).
The bottom line is that Nook needs to differentiate itself as much as possible from Amazon to have a shot at pulling more of the market. The Microsoft partnership might offer that chance. Any Windows 8 tablet can essentially become a Nook with the use of the official app but there would need to be a purposeful, Windows-backed device to make it Barnes and Noble’s distinct answer to the Fire.
The tablet market is dominanted by Apple and Android right now, with the gap between them closing. According to IDC, Apple slipped from a 61.5 percent market share in 3Q11 to 54.7 percent in 4Q11. In the same period, Android rose from 32.3 percent to 44.6 percent. As the IDC chart below shows, there aren't any strong contenders for third place. The 4Q11 segment had miniscule market shares for Blackberry (0.7%) and WebOS (0%, down from 5% the previous quarter). Barnes and Noble had 3.5 percent market share, placing it in a stronger position than the others. This means that B&N has a better shot at taking a chunk of market share but it can't get there without taking some risks.
Source: IDC
Final Thoughts
Barnes and Noble shares were up 63 percent mid-day Monday to $22.29. Most of the increase happened in the premarket before the fervor began to slow down. Is there cause to be optimistic about this deal? Sure. It certainly can’t hurt Barnes and Noble at this point to have the assistance and movement trumps stagnation.
But the optimism needs to stay realistic until more is known about what the duo has planed. Yes, there was another company that Microsoft stepped in to help about 15 years ago. Yes, that company went on to do rather well for itself in the long run. But Barnes and Noble is not now, nor will it ever be, Apple.
LynBetz has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, Google, and Microsoft. Motley Fool newsletter services recommend Amazon.com, Apple, Google, and Microsoft. 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.
