It’s a deal that values the Nook eReader at more than its parent company. Yesterday, Microsoft announced a $300 million investment in the Nook subsidiary of US book retailer Barnes & Noble, valuing the business at $1.7 billion – double the market capitalisation of Barnes & Noble itself. Barnes & Noble’s shares closed the day 50 per cent up, with Microsoft on the other hand pretty flat (a gain of 0.1 per cent probably ranks as pretty flat in most people’s books… or eBooks…).
For its $300 million, Microsoft acquires 17.6 per cent ownership of a newly created Nook business unit (merely called “Newco” at this time – but expect something with more zing pretty soon) in what it describes as a “strategic partnership [to] accelerate the transition to e-reading”. Barnes & Noble will hold the remaining 82.4 per cent, and the unit will retain the ongoing relationship with its retail stores – for those readers who have never visited a Barnes & Noble, the company places a Nook sales counter right in the entrance to every store and pushes the eReader like crazy.
As a consequence of the deal, the two companies have agreed to settle their ongoing legal dispute over patent claims, but more on that later. The new company will start development of a Nook app for Windows 8, to accelerate the push into international markets. Andy Lees, President of Microsoft, said that
“Our complementary assets will accelerate e-reading innovation across a broad range of Windows devices, enabling people to not just read stories, but to be part of them. We’re at the cusp of a revolution in reading.”
There’s already a Nook for PC app, and it’s unclear just how different the mooted Nook for Windows 8 app will be – except that it will obviously come pre-installed and feature prominently on all Windows 8 products. Plus you can also download Nook apps today for Mac, Android and iOS, and there’s no sign that support for these competitive platforms will cease. William Lynch, CEO of Barnes & Noble, added:
“Microsoft’s investment in Newco, and our exciting collaboration to bring world-class digital reading technologies and content to the Windows platform and its hundreds of millions of users, will allow us to significantly expand the business… and to solidify our position as a leader in the exploding market for digital content in the consumer and education segments.”
It’s not only Apple that is keen to exploit the digital textbook sector. Barnes & Noble already has an established college business and, with Microsoft’s help and investment, plans to be a major player in the distribution and management of digital education materials to students and teachers. According to Apple, it already has 20,000 educational apps for iOS and there are 1.5 million devices deployed in schools, as of this January.
Buried within an extensive legal filing to accompany the news, are details of annual advance payments. Microsoft will make non-refundable advance payments to Newco as part of a revenue sharing deal for Windows 8 applications.
It will pay $60 million a year for the first three years. In addition, Microsoft will pay a further $25 million a year for the first five years to help Newco acquire local digital reading content and technology. That’s a further $305 million over five years.
During an investor call, Lynch was reported as saying that: “clearly we think the biggest opportunity through this partnership is in terms of growth internationally.” Hence the push to acquire local (i.e. overseas) content.
As mentioned, the two companies have also settled their patent litigation. Newco will have a royalty-bearing license under Microsoft’s patents for its Nook eReader and Windows 8 tablet products.
Over a year ago, Microsoft started court proceedings against Barnes & Noble over alleged patent infringement regarding its use of Android for the operating system of the Nook. It actually uses a “forked” version of Android, and not one of Google’s official release versions. However, Microsoft owns some Android patents and it claimed the bookseller was using them illegally.
If Microsoft though Barnes & Noble would be a push-over, it was seriously mistaken. The firm hit back with a robust defence (well worth a read of the legal archives if you need to while away a rainy May afternoon, as their discussions sounded non too amicable!).
Barnes & Noble’s lawyers claimed Microsoft was demanding “exorbitant license fees and absurd licensing restrictions” in order to make Android uneconomical for device manufacturers. It says the licence fee Microsoft wanted for its “trivial, not infringed and invalid” Android patents was more than Microsoft charges for its entire Windows Phone 7 operating system.
And so the lawyers slugged it out for a year, resulting in yesterday’s announcement that a deal had been reached. A legal ruling was expected from the US International Trade Commission on April 27th. That will no longer happen, and Microsoft avoids the potential of a ruling against it, which would seriously hurt its nice little Android IPR earner.
Who would have thought it, a year ago, when cries of foul play and antitrust breaches were being levelled at Microsoft? In fact, Barnes & Noble’s share price was dropping fast in January, falling to $9 a share before it made the announcement that it was exploring a spin-off for its Nook division. Barnes and Noble retail stores reported $1.5 billion of revenues last quarter, up just two per cent year-on-year. However, Nook sales (hardware and software) rose 38 per cent to $542 million.
Patent watcher Florian Mueller says that the agreement on “a royalty-bearing license” for Newco to use Microsoft’s patents is: “a real blow to Google, which tells Android device makers to refuse to pay but doesn’t do what it takes to properly address Android’s intellectual property infringement issues.”
He adds that at the end of January, Microsoft was claiming that over 70 per cent of Android devices sold in the US have a license to use Microsoft’s patents, with licensees including Samsung, HTC and LG. Motorola Mobility is now the only Android device maker to be involved in litigation with Microsoft.
We now have a three-horse race: Amazon/Kindle, Apple/iBook, and now Microsoft/Nook. Of course there are other eReaders out there, such as Sony’s products and the Japanese-owned Kobo that’s popular here in the UK, but these now look like being marginalised. Just like the phone sector, the market tends to become dominated by three major players or ecosystems. Barnes & Noble has just become a serious contender.
Yet despite buddying up with Microsoft as its investment partner and announcing plans for a new dedicated company, Barnes & Noble warns that a physical separation might not happen. It looks like the two former adversaries are going to have to spend some quality time together before they formally get hitched.
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