In Nook, Microsoft sees a chance to compete against Amazon and Apple

nook app for windows 8

Microsoft, which already has a stake in Barnes & Noble’s Nook and college bookstore businesses, is offering to buy them outright for $1 billion, according to a report in TechCrunch, based on leaked internal documents. The documents also reportedly say that Barnes & Noble plans to discontinue its line of Nook tablets by the end of fiscal year 2014, while letting the e-readers stick around for awhile longer.

Publishers Lunch points out that much of the financial analysis in the report of the proposed buyout is inaccurate: Among other things, while the report says a $1 billion purchase price is “well below the price it had originally bought in at,” Publishers Lunch notes that because of the way the original investment was structured, this price would actually represent a small premium. Nonetheless, if the documents are legit (the NYT says they are, but appear to be a few weeks old), it’s worth thinking about what Microsoft wants with the Nook business. Barnes & Noble shares were up 23 percent in pre-market trading this morning.

A reading ecosystem for Windows 8

It’s not surprising that Microsoft reportedly has no interest in Barnes & Noble’s tablets, which have never taken off. In fact, as of last week, the Nook HD and HD+ incorporate a full host of Google services, including Google Play, Gmail and the Chrome browser. While B&N has claimed it is committed to the Android platform and to the tablet business overall, Microsoft obviously has no incentive to keep a line of poorly performing Android tablets up and running.

What Microsoft does need is a reading ecosystem for its Surface tablets and other Windows 8 devices. That’s why the company bought a stake in Nook in the first place, but so far it hasn’t resulted in much more than a Nook app for Windows 8 (released after Amazon launched its own Kindle for Windows 8 app). With full control over the Nook ecosystem, Microsoft can take advantage of some of the technology — including book discovery and “scrapbooking” features — that Barnes & Noble has built for these devices without being dragged down by the devices themselves. It would also presumably get access to Nook’s ebook publisher relationships, which lie with Nook Media, not with Barnes & Noble.

A pre-existing customer base to compete against Amazon and Apple

The buyout could also help Microsoft compete against Amazon and Apple. Kindle is still the leading e-reading platform, and Apple’s share of the e-reading market is small, but growing, especially when it comes to heavily illustrated and interactive titles. While there is no guarantee that Microsoft can become a leader in e-reading, it has a better chance of doing so if it harnesses an existing platform and customer base and then extends it to Windows users worldwide, rather than attempting to build a system from scratch.

A caveat is that Nook hasn’t managed to grow its market share against Kindle. It’s been stuck around 25 percent since 2011. But that’s better than the zero that Microsoft has now. “They can afford it as a bet, even if it is a long shot,” Peter McCarthy, the founder of book publishing consultancy McCarthy Digital, told me. “Microsoft is awful with content and know it. They’re  always looking for another Xbox, though.”

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