Will Microsoft's New Venture with Barnes & Noble Reward Investors?
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It is fair to say that Apple’s (NASDAQ: AAPL) iPad has everyone rethinking strategy. What is a competitor to do? Go for a less expensive imitation? Try a ‘one-up’ play with an amazing new tablet? Several companies, such as Samsung and Sony have taken up the pursuit to make a similar product that does everything the iPad does and to offer it for a few hundred dollars less.
Is this the strategic approach? On the horizon, I see two companies working in tandem which might offer a great new product that will catch the consumer’s eye. Intel (NASDAQ: INTC) and Microsoft (NASDAQ: MSFT) are partnering on a new touch pad that I predict will offer a boost in stock performance through media attention in the coming quarters and when it is released.
But that’s not all! Microsoft is also making a play in stealth competition against Apple, as well as other eReader manufacturers like Amazon (NASDAQ: AMZN) by its investment in the Nook.
What is Happening
Recently, Microsoft has decided to invest $300 million in a new joint venture with Barnes & Noble (NYSE: BKS). It is raising quite a stir, making people wonder if this was part of an effort to provide e-books and articles across myriad devices while simultaneously spreading the reach of Windows 8.
The deal is big, but really shouldn’t be looked at as a surprise. Barnes & Noble said in January that it planned to spin off its Nook business. What it didn’t have, was the right buyer. With Apple already the dominant force in mobile computing et al, it seemed like Amazon was the shoe in for such a move.
Recently, Amazon revealed its plan for its first official store in Seattle, which will offer its line of Kindle products, as well as other key brand merchandise. In their own store, Amazon will have more control over the training, selling, and of course, more of the profits, as well as put them on the same level of Barnes & Noble which offers the same for its Nook.
Nevertheless, it was Microsoft that stepped up. In the details of the deal, Microsoft's investment values the overall Nook business at $1.7 billion, more than double the $792 million market value for all of Barnes & Noble at the close Friday. It also includes a Nook application for Windows 8, Microsoft's main operating system.
In comparison to what is happening across the tech world in terms of investments, mergers, and acquisitions, $300 million seems like a good deal for both companies. The struggling book seller could use the capital boost. Microsoft might also be trying to flood the market with several devices supporting Windows 8 – a clear win for them. Not only that, the price tag compared to what Facebook paid for Instagram is quite reasonable.
What it Means
But here’s the real benefit for Microsoft: Not only does it get another device to run Windows, it is also a win-win for the company. If the move succeeds, Microsoft would have cheaply established a presence in a world currently dominated by Amazon and Apple. If Microsoft fails, it's a meaningless tax write-off that won't make a difference to the company's stock. This is a far cry from the dependency of Barnes & Noble, whose shares rose 52% on the announcement of the deal.
But that’s not the main goal. From ample research and observation of the company, I see its move as a page taken right out of Sun Tzu’s Art of War. Microsoft is boldly taking aim at the tablet market. It is actively involved in Intel’s ultrabook product designs, ensuring the proper implementation around Windows 8's touch-enabled features. The combination of ultrabooks and touch screens is something many believe could be a silver bullet in the fight against traditional notebooks and the iPad.
But ever so subtly it has started wearing away at the ‘unprotected defenses’ of Apple – namely it’s Reader. Yes, the iPad can function as a reader, but that isn’t how it is marketed. It is a tablet, combining all your social media, music, videos, into an easily carried device. In that area, Apple is the name on everyone’s lips.
If Microsoft got everyone thinking its name in combination with the reader, this would be a stepping stone to an ever expanding market share. In other words, the Microsoft brand could carry enough weight to eliminate other competitors and then simply market to the world that it is “so much more than a reader.” With that kind of momentum, it could do heavy damage to the Apple stranglehold.
What to Watch Out For
This is not the first time Microsoft has given the e-reading business a try. The Windows Pocket PC platform for mobile devices debuted on April 19, 2000. The Microsoft Reader was embedded in the platform, "allowing you to read e-books on the go." However, lackluster sales and other efforts that prevented R&D funding stalled the program. It eventually got out of the Reader business altogether in August of last year. This move isn’t really ‘getting back into it,’ but more of a focused approach to revive an old project while simultaneously improving market entry for its newer products.
Microsoft with this move has also eliminated fears in the mind of consumers. Several have expressed concern that their eBook and eReader purchases might disappear if a company goes out of business. This was a huge advantage for Apple, whom many saw as too big to fail. It was also a contributing factor to low to moderate sales for Amazon and other eReader manufacturers. When Borders failed, consumers were forced to choose which side to take in terms of longevity. Microsoft now offers another longstanding company they can trust in.
Currently, Nook runs on Google’s Android platform. This will not last long as it is reasonable to assume Microsoft will spread the Windows 8 agenda. However, this could put Amazon in a tight spot. Will it change to a Windows based platform? Currently, Amazon controls about 60% of the e-book business in North America. That is a hefty number in terms of Android operators that could be converted to Windows users.
Summary
For Barnes & Noble, Microsoft's deep pockets are an answer to prayer. The company still struggles with issues that ultimately pushed its former rival Borders into bankruptcy, namely being a book seller in an online world.
Microsoft’s strategy is bold, and multi-leveled. I see this move as yet another example of powerful and strategic leadership that will undoubtedly result in positive performance for the company.
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