SEATTLE — Microsoft Corp. and Barnes & Noble Inc. announced Monday that they’ve teamed up in the digital books industry, creating a new subsidiary that will compete with Amazon.com Inc., Apple Inc. and others in the digital reading and college textbooks businesses.
Microsoft will invest $300 million in the as-yet-unnamed subsidiary, giving the software giant a 17.6 percent equity stake in an area where it had been lacking presence: electronic books.
While one of the most immediate and concrete results of the partnership will be a Nook application for Windows 8, the partnership is about far more than just an app.
At its core, the deal is about about competition over where consumers buy, create and store their digital content.
The partnership will have many dimensions “to jointly create compelling experiences across a range of Windows devices,” allowing users to buy, consume, create and publish content, Barnes & Noble CEO William Lynch said in a conference call Monday.
E-book sales are forecast to grow in the next few years from less than 5 percent to more than a third of books sold, noted Andy Lees, a president at Microsoft, who also spoke at Monday’s conference call. “Clearly, we are on the cusp of a digital reading revolution, and this partnership positions Microsoft to accelerate it.”
Lees noted that while the partnership agreement includes a revenue share, what’s more important is “defining the future of reading.”
The partnership will enable Microsoft and Barnes & Noble to look at the future of how people are going to read, interact with stories, learn using these types of materials, and create works, he said.
“We think we have a lot more to add than just being the platform provider. That really is what this partnership enables us to do,” Lees said. “You’ll see a blurring of different content types” — an area where Microsoft thinks it can add value.
Lees cited, as an example, how interactive children’s stories can be and how textbooks might be more interactive, as well. “In these sets of scenarios, we’re going to have a larger role to play than just being the platform provider,” he said.
Neither Lynch nor Lees would say whether Windows 8 would power Nook tablets in the future. But Lynch did note that the Nook runs on a Texas Instruments platform with an ARM-design processor and that Microsoft has said that a version of the upcoming Windows 8 operating system — called Windows RT — is designed to run on ARM processors, including TI’s.
The Nook e-reader and Nook Color tablets run on Google’s Android software. Last year, Microsoft had filed a lawsuit, claiming Barnes & Noble infringed on some of its patents with its Android-run Nooks.
The two companies apparently put aside their differences, saying on Monday that they’ve settled their patent litigation. Moving forward, they said, Barnes & Noble and the new subsidiary will be paying Microsoft royalties for use of its patents in the bookseller’s Nook e-reader and tablets.
Lynch also said during the conference call Monday that much of the investment from both companies will be going to fuel the growth of the Nook bookstore internationally. Currently, Barnes & Noble has no presence in the international digital book market, he said.
“Our view is that Microsoft will want to make sure that there are alternatives to Amazon. ... for digital content and make sure there is a counter balance to Apple’s growing partnerships for content and creation of interactive educational content,” Nomura analyst Rick Sherlund said in a note.
The deal puts to rest concerns that Barnes & Noble doesn’t have the capital to compete in the e-book business with Amazon and its Kindle, said analyst David Strasser at Janney Capital.
The Nook has pleasantly surprised publishers, who worry about Amazon.com’s domination of the e-market. Unveiled to skeptical reviews in 2009, the Nook is estimated to account for about 25 percent of the U.S. e-book market. It helped cut Amazon’s share from what was believed to be 90 percent to around 60 to 65 percent.
