Summary:

Microsoft and Barnes & Noble are forming a strategic partnership that combines the Nook and college businesses into a new company. Microsoft is making a $300 million investment in the new company and Nook e-books are coming to Windows platforms.

Nook Digital Shop
photo: Barnes & Noble

A few months after Barnes & Noble announced it was looking to spin off its Nook business, Microsoft and B&N are forming a strategic partnership that combines Nook and the B&N college businesses into a new, still unnamed company (for now called NewCo). Microsoft is making a $300 million investment in the new company “at a post-money valuation of $1.7 billion in exchange for an approximately 17.6% equity stake.” (As Om points out, that valuation deems Nook worth more than Barnes & Noble itself.) Barnes & Noble will own the rest of the new subsidiary, “which will have an ongoing relationship with the company’s retail stores.”

Barnes & Noble “intends to explore all alternatives for how a strategic separation of NewCo may occur,” the release says. The 8-K filed this morning explains that under a separation “B&N would continue to sell NewCo’s devices and device accessories and provide service and accept returns in B&N’s retail stores.”

The partnership with Microsoft “will allow us to significantly expand the business,” said B&N CEO William Lynch. Part of that expansion is a Nook app for Windows 8, “which will extend the reach of Barnes & Noble’s digital bookstore by providing one of the world’s largest digital catalogues of e-books, magazines and newspapers to hundreds of millions of Windows customers in the U.S. and internationally.” The release notes that B&N and Microsoft settled their patent litigation and “Barnes & Noble and NewCo will have a royalty-bearing license under Microsoft’s patents for its Nook e-reader and tablet products.”

Microsoft’s Andy Lees said, “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 on the cusp of a revolution in reading.” As my colleague Kevin Tofel notes, Microsoft has experimented (mostly unsuccessfully) with e-reading in the past, and the B&N partnership could help it regain some momentum.

A focus on international growth

Barnes & Noble has said it will launch the Nook in the UK this year, reportedly in partnership with bookstore chain Waterstones, but the London Book Fair came and went with no announcement.

In an investor call following the announcement this morning, Lynch said “the large majority [of new users] are going to be incremental. If you look at where most of our content sales come from today, clearly we think the biggest opportunity through this partnership is in terms of growth internationally.” He added, “Anything internationally by definition is incremental because we haven’t been there yet.”

Microsoft will help cover the costs of international expansion. The 8-K explains that Microsoft will pay NewCo $25 million a year for the first five years, “for purposes of assisting NewCo in acquiring local Reading Content and technology development.” As Publishers Marketplace notes, “local actually means international.”

Microsoft will make advance payments to NewCo

According to the 8-K, Microsoft will pay NewCo $60 million for each of the first three contract years and an unspecified amount after that, up to an unspecified amount. Microsoft gets an unspecified revenue share from NewCo.

Publishers will sign e-book contracts with NewCo, not B&N

“Content lies” with NewCo, Lynch said. “The relationships with publishers will be Newco relationships.” In other words, book publishers would sign e-book contracts with the new company, not with Barnes & Noble.

Don’t worry too much about the Android part for now

The Nook e-readers and tablets are Android-based. Windows is not! “We’ve always said we want readers to be able to read in the device of their choosing,” Lynch said, adding, “if you want to read your book on an iOS product or Android product…you can of course do that.”

However, the 8-K notes that “NewCo will use the [Windows Phone] Marketplace as the in-application commerce transaction platform, when available, for commerce transactions in the NewCo Phone App, including payments and fees associated with Content acquisition and subscriptions (if available). NewCo will ensure that the NewCo Phone App will provide for in-app purchasing and will not link out of the NewCo Phone App to complete purchases of Content.” That would mean a change to Nook iOS apps, which currently get around Apple’s revenue share requirements by not allowing in-app purchases.

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