Microsoft, Barnes & Noble Partner to Shake up E-book Market

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The e-reader and tablet wars took an intriguing turn today. Microsoft announced that it is investing $300 million in a new Barnes & Noble subsidiary that ties together the bookseller’s Nook e-book and college textbook businesses.

While the companies hint at the possibility of spinning off the new digital subsidiary as a stand-alone public company, all options remain in play. In the meantime, Microsoft has a 17.6 percent stake in the new, unnamed business, which carries a valuation of $1.7 billion. Barnes & Noble keeps the rest, a 82.4 percent stake.

And in the midst of the deal making, Barnes & Noble’s legal team gets a breather.

With the formation of the new subsidiary, the companies are burying the hatchet on patent lawsuits surrounding the Android-based Nook. Under the terms of the settlement, Nook-branded e-readers and tablets from Barnes & Noble and the newly formed subsidiary will be covered by a royalty-bearing license for the software giant’s patents.

With the patent wars behind them, the companies are poised to wage another battle. This time, against rivals in the burgeoning — and overlapping — e-book and tablet wars.

Sights Set on Apple and Amazon

The partnership is expected to help Microsoft and the embattled bookseller gain momentum in the exploding e-book market, according to Andy Lees, a president at Microsoft and former head of the Windows Phone unit. In a company statement, he commented, “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.”

But two big obstacles stand in the way: Apple and Amazon.

Apple is the unquestioned king of the tablet market, whose iPad helped propel the company to record-breaking profits in the last quarter. While currently embroiled in a Department of Justice lawsuit over e-book pricing, Apple’s support of its iBooks business continues unabated and has expanded to include the education market.

Not content to be the leader in e-books, Amazon is emerging as a force in the mobile computing landscape. The Kindle Fire e-reader not only sits atop the online retailer’s best-selling product list, it’s also having a big impact on the Android OS ecosystem. According to comScore, the Kindle Fire makes up 54 percent of the Android tablet market.

Microsoft and Barnes & Noble plan to challenge these market leaders with a two-pronged strategy.

First, the companies are developing a Nook app for Windows 8. They expect that the partnership will extend the reach of the Nook bookstore to “hundreds of millions” of Windows users worldwide. And for Microsoft, the Nook app gives upcoming Windows 8-based tablets a well-integrated e-book platform.

Although it’s no secret that Microsoft is courting businesses with the prospect of Windows 8 tablets, today’s announcement also signals that it’s also hoping to see Windows tablets on college campuses. The companies plan to leverage Barnes & Noble’s College business. Combined with NOOK Study software, Microsoft and Barnes & Noble plan to strengthen Nook’s position as a digital distribution and management platform for educational e-books and materials.

Pedro Hernandez is a contributing editor at InternetNews.com, the news service of the IT Business Edge Network, the network for technology professionals. Follow him on Twitter @ecoINSITE.