Microsoft Looks to Change the Ebooks Landscape
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Last week Microsoft (NASDAQ: MSFT) announced it was investing $300 million cash into a new Barnes & Noble (NYSE: BKS) subsidiary, which combines the company's Nook e-reader with a digital bookstore for smartphones, tablets and PCs. The monies invested will give Microsoft a 17.6 percent stake in the unnamed subsidiary. The subsidiary will develop a Nook application based on the Barnes & Noble Nook ebook platform for its Windows 8 operating system launching later this year.
The agreement goes beyond the immediate injection of $300 million into the business. Barnes & Noble will receive payments totaling $605 million which include $125 million in additional payments to support content and technology development over five years and another $180 million in revenue-sharing advances over three years.
What is Microsoft's goal in doing the deal with Barnes & Noble? To challenge the two undisputed leaders in the roughly billion dollar ebook industry – Amazon (NASDAQ: AMZN) and Apple (NASDAQ: AAPL) – which manufacture the Kindle and the iPad respectively. Ebooks represent approximately 5 percent of all book sales currently.
The deal looks like a winner for Barnes & Noble at first glance. After all, there will soon be a Barnes & Noble digital bookstore attached to Windows 8 and Windows 8 will soon be on millions of devices – PCs, tablets and smartphones like Nokia's. It is also a possibility that the deal means the two companies will cooperate on pushing the Nook tablet, again butting heads with Apple.
The real key though to whether this deal is a winner for both companies will come down to one very important area... international sales. The joint venture will use Microsoft's vast global reach to expand quickly beyond the United States in the next several months.
The move into overseas markets is quite a change in the corporate culture for Barnes & Noble which currently generates all of its revenues in the United States. However, it will immediately be behind its rival Amazon internationally. Amazon sells its Kindle devices at retailers in the United Kingdom, Germany, France, Canada and Australia. It also offers the Kindle through its website in 175 countries and sells digital books in seven languages. The company will face other competitors in overseas markets too including Apple and a number of Asian competitors.
A problem Barnes & Noble will face in trying to sell in overseas markets is its lack of a physical presence in international markets along with a lack of expertise in those areas. The company currently sells most of Nooks through its 691-store retail network in the US. It is already in discussions to begin selling the Nook in certain UK bookstores and the Microsoft deal should certainly generate increased interest from overseas partners.
With Microsoft's expertise, Barnes & Noble should be able to gain footing in international markets where most in the industry say are two years behind the US in adoption of ebooks. The company has already enjoyed a certain amount of success here in the US. Despite Amazon's two-year lead in selling ebooks, Barnes & Noble has been able to carve out a solid 30 percent share of the market. So it knows how to market ebooks well and will likely do so in those international markets.
Those foreign markets are definitely worth going after. Look at Europe, for instance. In the UK, ebook sales have been growing at the same rate as in the United States. Adoption has been slower in Europe itself, but that may be a good thing for Barnes & Noble as it represents almost virgin territory. Ebooks account for less than 2 percent of the book market in France and Germany, according to research firm Sebastopol.
And PriceWaterHouse Coopers says that ebook sales in Europe will grow by 113 percent in 2012. Contrast that to a gain in US consumer ebook sales of 42 percent to $2.5 billion or 11 percent of the overall consumer book market.
In Asia, ebook penetration is also very low at 6 percent. So what Barnes & Noble chief executive officer William Lynch said is true, “It's the first inning in all those markets.” And now with Microsoft's financial might, Barnes & Noble will have strength to stand toe-to-toe with the likes of Amazon, Apple and Google in the fight for global market share in the ebooks market.
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