Why are so many companies investing in Nook Media (B&N’s Nook spin-off)?

The news that Pearson just invested $89.5 million in Nook Media, giving Nook Media a $1.8 billion valuation (more than B&N itself), means that we now have -

  1. Microsoft having invested $300 million for a 18% stake in Nook Media. It has also promised $300 million more.
  2. Pearson having invested $89.5 million for a 5% stake in Nook Media.

Here is Pearson’s official announcement of its investment in Nook Media. An interesting snippet -

Pearson will invest $89.5 million in cash in NOOK Media, gaining a five per cent equity stake. Following the transaction, Barnes & Noble will own approximately 78.2 percent of NOOK Media and Microsoft will own approximately 16.8 percent. Subject to certain conditions, Pearson will earn the option to purchase up to an additional five percent ownership in NOOK Media.

Pearson’s strategic investment in NOOK Media will help accelerate customer access to digital content by pairing the company’s leading expertise in online learning with NOOK Media’s expertise in online distribution and customer service.

There are two very interesting things here:

  1. Microsoft and Pearson have both invested in Nook Media at a very high valuation. They have both added in provisions to invest more.
  2. Nook Media gets $389.5 million now and another $300 million from Microsoft in future (surely, there must be conditions) and some undisclosed sum from Pearson in future if Pearson decides to get another 5% stake.

Suddenly Nook Media is a $1.8 billion valued company with $389.5 million cash. That’s stunning if you consider that -

  1. ALL of Barnes and Noble currently has a market valuation of $883 million.
  2. B&N just announced that Nook Holiday Sales have been below par and it’s not going to meet its projections for Nook Sales for 2012.

It all makes you wonder.

Why are so many companies investing in Nook Media?

There are a few reasons -

  1. Amazon. Amazon looms over all of books as a very, very dangerous adversary. Sooner or later we are going to see Publishers start to team up against it much more obviously. First, they used Apple and the Agency Model. Now, it’s going to be Nook and some new strategy.
  2. Nook Media actually has a good chance of doing well. It’s almost like a recurring revenue business with high up-front costs and relatively lower costs down the line. Customers that B&N has on Nook are going to stay with B&N until and unless something markedly better comes up.
  3. Transition. The Dinosaurs are figuring out that they have to transition. How do they transition? First, they invest in companies that will let them invest. Second, they start making their own companies. Third, they figure out which works better.
  4. B&N customer base. This might come as a surprise to some people – B&N customers will pick Nook if all other things are equal or close. Time after time we see Amazon customers and B&N customers disregard lots of flaws in the devices and in the closed garden. Why? Because there is trust and a relationship built over years (sometimes over decades).
  5. Nooks are very good devices in physical device terms. B&N tends to ship devices before the software is polished. This time, with Nook HD and Nook HD+, it really stretched things to an extreme – amazing hardware, alpha-level software. If B&N figures out how to make great software for Nooks right from launch (and it’s a big IF) then Nook Media has a bright future.
  6. B&N is still a player in the Tablet Market and it’s still a strong player in the Reading Tablet market.
  7. What other option do companies like Microsoft and Pearson have? Will Apple take an investment? Will Amazon take an investment? Will Google take an investment? What’s left?
  8. B&N Stores. B&N has very good retail footprint. It’s safe to assume Nook Media will enjoy a special relationship with the 700+ B&N Retail Stores and the 660+ B&N College Bookstores.

We are going to see a LOT more of this.

We have the Big Six Publishers merging with each other. We have Publishers and Companies investing in Nook and colluding with Apple.

It might be 4 years too late. But Publishers are finally waking up to the fact that Amazon wants the ENTIRE cake for itself. Perhaps it’s not too late. Perhaps there’s still time to prevent the New Gatekeeper from destroying the Old Gatekeepers.

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