Would you pay $300 million for a slice of the #2 eBook & eReader business?

Microsoft just did. Thanks to Roger Knights for the heads up.

Bloomberg reports that Microsoft invested $300 million to get a 17.6% share in a new B&N subsidiary which combines B&N’s Nook digital reader business with its college bookstore business. The companies are calling it a ‘strategic partnership’ in the B&N + Microsoft Press Release - A strategic partnership to accelerate the transition to e-reading.

Microsoft gets 17.6% while B&N keeps 82.4%. The exact shares were decided after a game of hopscotch in kilts.

This is hugely important to both the ebook and eReader markets (the investment, not the game of hopscoth). It might also be hugely important to the high value Tablet market. An almost doubling in B&N’s share price certainly suggests the market thinks so (of course, that probably means the venture is going to inadvertently create a new monkey virus that wipes out humanity).

Even analysts are chiming in with words of encouragement -

The partnership with Microsoft could give the Nook the kind of content and global expansion to make it a bigger player in the tablet business, said Michael Glickstein, chief investment officer with G Asset Management LLC.

That kind of partnership makes the Nook business more valuable, Glickstein said.

No kidding. Nook is suddenly a Microsoft backed business and connections to Gigantically Profitable Software Makers are far more fetching than comparisons to brick and mortar anything.

Microsoft’s Investment in B&N’s Nook Business is Hugely Important

Let’s see why this could be a huge, huge thing (you could just skip to the second list, the one after this one, for why it’s important for Kindle owners and book lovers):

  1. It values B&N’s ebook and college bookstore business at $1.7 billion. The second biggest ebook business is a billion dollar business (or nearabouts). Still think this is discounted by a factor of 3 or more.
  2. B&N’s new Nook Inc. subsidiary will develop a Nook eReader application for Windows 8. That app will probably get default eReader App placement in the Windows 8 App Store. There are already signs that B&N is becoming increasingly important in ebooks (a stronger #2). This will cement Nook as the #2 ebook business. Perhaps even give Amazon a run for its money.
  3. The hundreds of questions about B&N’s stability and how that would affect Nook’s future just got put to rest. Which means that the biggest competitive advantage Amazon had (stability) just got eliminated. This will force Amazon to innovate Kindle and Kindle Tablet more. It will give B&N more confidence to keep making Nook Tablets and Nook eReaders.
  4. Microsoft has a sharp eye for billion dollar businesses. It has 9+ such businesses of its own and you can be sure it thinks highly of Nook to actually invest in it. I’d make a serious bet that over the course of the next 10 years this 18% share would end up being much more important to Microsoft than Microsoft’s share in Facebook (which, to be fair, is in the very low single digits i.e. 1.6%).
  5. Microsoft and B&N settled their patent litigation. More stability for Nook Inc. 

Let’s jump ahead to the really important stuff. The impact on readers, on ereaders, and on tablets. 

Hugely Important to Readers and eReaders

Much more interesting to us Kindle owners and book lovers is why this ‘strategic investment’ by Microsoft is hugely important for books and ebooks and eReaders:

  1. B&N claims 30% market share in eBooks. Combine that with it probably becoming the default eReading App on Windows 8 and suddenly Amazon is looking over it shoulder.
  2. A separate Nook & College Bookstores businesses (Nook Inc.) isn’t saddled with the legacy brick and mortar bookstores. Nook revenue grew 38% to $542 million in the last quarter. This is a seriously big business. Revenue for the fiscal year ending in April 2012 is projected to be over $1.5 billion. If Nook Inc. were unprofitable and run by a college dropout it would be considered worth $10 billion (unless it also stole people’s personal information – then it’d be $25 billion).
  3. B&N has been innovating on both the eReader front (Nook with Glow Light) and the Tablet front (the $199 Nook Tablet). This $300 million investment from Microsoft means it has more security and can keep innovating. That pushes Amazon to improve Kindle and Kindle Tablet more.
  4. Windows 8 means hundreds of millions of users. The importance of being the default Windows 8 App can’t be understated. Much of the Microsoft Anti-Trust lawsuits revolved around IE and Media Player being defaults shipped with Windows. B&N’s Nook eReader App gets that privilege and advantage now. The huge and undefeatable power of the default.
  5. The inclusion of College Bookstores is being touted as important. It might be. It supposedly puts B&N’s new Nook Inc. in position to challenge for the eTextbook market.
  6. Amazon, like any other company, has always needed a serious competitor to keep it honest and hungry. While B&N has done a good job there’s always been doubt around how long it would be around. The double measures of a Microsoft investment and the creation of a fast-growing subsidiary suggest that B&N, the strong #2 player in ebooks and eReaders, will stick around for a while.
  7. In the best case, this move might actually help accelerate the growth of ebooks. At worst, it will ensure that ebook growth doesn’t come to a standstill. You can bet that both B&N and Amazon will now make really, really good reading applications for Windows 8.

Amazon has shown that it improves the Kindle most when it has a strong competitor breathing down its neck. It’s also shown that it is quick to learn from innovations B&N makes. It took its sweet time to release the Kindle Fire – However, once Nook Color validated the market for high value tablets Amazon did release Kindle Fire.

The investment by Microsoft in B&N’s Nook Inc. will revitalize the Kindle team and energize B&N’s Nook Team. In one swift stroke Microsoft has breathed life into the competition in eBooks and eReaders and High Value Tablets.

Hugely Important to High Value Tablets

There are some very interesting questions about the future of Nook Tablets and Kindle Fire Tablets that come up -

  1. Firstly, as the analyst points out above, this gives B&N the strategic knowhow to go international with Nook Tablet.
  2. That would force Amazon to go international with Kindle Fire.
  3. Secondly, it raises the possibility of a Windows 8 powered Nook Tablet. Surely, now that it owns 18% of B&N’s Nook Inc., Microsoft will push for Windows 8 based Nook Tablets.
  4. B&N might be offered the inside track and might very well move to Windows 8 Nook Tablets. Android lacks one huge thing Windows 8 promises – a connection to all the desktop software that Windows 8 will have. It makes little sense for phones – but a lot of sense for 7″ Tablets.
  5. It would force Amazon to also move to Windows 8. A Kindle Fire Android App Store just wouldn’t be able to compete with the Windows 8 App Store in the long run.
  6. Thirdly, the investment and the Nook Inc. subsidiary means that Nook Tablet won’t have to pay for the sins of the brick and mortar bookstores. Nook Inc. gets a clean sheet. It’s a business growing at 38% per year (approximately) and it won’t be Border’ized.
  7. Fourthly, Microsoft will absolutely provide a lot of business connections and relationships. Think better ties with manufacturers, intelligence from Microsoft divisions, and lots of other potential benefits. Wouldn’t be a surprise to see Nokia phones coming with the Nook App as the default ebooks app.
  8. Fifthly, given that B&N’s Nook Tablet is the second best-selling Android Tablet and has the potential to atleast stem slightly the tide of migration to Apple devices, there is very strong motivation for Microsoft to keep strengthening Nook Tablet. Even if Nook Tablet sticks with Android – It’s still one less customer lost to the Apple family. A customer who would then proceed to buy iEverything and MicrosoftNothing.

Overall, the Nook Tablet part might be the real reason Microsoft has invested in B&N’s Nook Inc. Saying it’s all about ebooks might be a convenient cover. Just the way that Amazon claimed Kindle was all about ebooks and reading and then proceeded to create the real Kindle Killer, the Kindle Fire.

In the Final Analysis

Barnes and Noble, the #2 ebook seller, the #2 eReader seller, the #2 High Value Tablet seller, is suddenly a lot stronger.

Amazon suddenly has very strong and stable competition.

Microsoft has made an investment which could be strategic in multiple ways. It might very well be that Microsoft sees three billion dollar businesses – Nook eReaders & eBooks, eTextbooks, Nook Tablets.

This 17.6% investment (for just $300 million) is about a million times smarter than the billions Microsoft is burning up on its badly strategized search engine business. On that note, it’s time for Microsoft to buy a certain small and sweet search engine (that rhymes with Luck) and unleash two horses in the search engine wars.

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