A Shotgun Marriage Between Microsoft and Barnes & Noble?

The Nook Tablet eBook Reader from Barnes & Noble

Earlier this week we heard what seemed like interesting, unexpected, and exciting news from beleaguered Barnes & Noble and their epic struggle to make second place a viable place, with their Nook battling against mighty Google’s Kindle.

Here’s a typical cheerleading article about this.

But is there a darker underlying truth to this?  Quite possibly so.

First, to put this into context, let’s take a quick recap on the situation prior to the announcement.

The Evolution of the Nook

Amazon’s online bookselling has been threatening B&N’s bricks and mortar stores for some time.  The release of the Kindle in November 2007 added a new element of threat – eBooks by their very nature were completely detached from any type of underlying bricks and mortar type presence.

After Amazon proved the viability of eBook selling, B&N decided to copy, releasing its first Nook competitor exactly two years after the Kindle came out (ie November 2009).  The first Nook was an eminently forgettable disappointment.

Barnes & Noble learned quickly, and in little more than a year, it released the Nook Color – a device which was better than the monochrome Kindle devices then being sold by Amazon.

Amazon played leapfrog, and a year later, the Kindle Fire was released (November 2011).  It was comparable in many ways to the Nook Color (albeit a bit smaller and lighter), and it had a significantly better price point – $199 compared to $249 for the Nook Color.

B&N scrambled to catch up to the Kindle Fire, and quickly announced a new competing product, the Nook Tablet.  Unfortunately this was priced at $249 to start, giving Amazon (and its much larger marketing clout) the ability to clean up in the pre-Christmas sales season with its sub-$200 Fire, which is believed to have outsold the Nook Tablet probably by a factor of two to one, maybe even more.

In February B&N came out with an 8GB version of their Tablet (the original had 16GB) which it priced at $199, the same price as the Fire.  The earlier Nook Color was dropped in price to $149, giving B&N a color reader at a lower price point than the Kindle Fire.  (Both companies also have lower priced monochrome units – at the lowest price points, there is a Kindle for $79 and a possibly slightly superior Nook at the same price.)

And now for the amazing dichotomy.  Amazon is believed to be selling their Kindle Fire for cost price and no more, but have been reporting improved earnings based on large part to the success of their Kindle product range.

Barnes & Noble, on the other hand, have been reporting diminished profits due to the impact of their Nook readers and the huge development and marketing costs associated with them.  They reportedly lost $233 million on their Nook program in the last nine months alone, and are projecting a full twelve month loss on their entire business (their fiscal year ends 30 April).

Now it is time to introduce Microsoft to this storyline, and you can then decide if Microsoft’s appearance, center-stage, presages a marriage made in heaven, or a shotgun marriage from hell.

The Nook Color and Nook Tablet both use Android as their underlying operating system (as does the Kindle Fire, too).  At the time, this seemed a good move on B&N’s part.

Enter Microsoft

But – and it is a big but.  Microsoft has asserted patent rights over elements of the Android operating system, and has been successfully bludgeoning Android phone manufacturers into paying as much as $15 as a licensing fee for every Android phone they sell.  Some 70% of Android phones sold now return Microsoft a license fee, and we estimate these fees are returning Microsoft the better part of $2 billion in additional bottom line annual profit.

Microsoft has its own massively lack-luster phone operating system that has been greeted with marketplace apathy, so it is actually making more money from the sales of competing Android phones.  (Does it even make sense for Microsoft to promote its Windows Phone 7 software when the Android money is so easily obtained?)

Microsoft trained its legal guns on B&N, and last year sued them, claiming the Nook Android devices were infringing on five of Microsoft’s patents.

It has now apparently reached a settlement with B&N, and has agreed to withdraw its suit, in return for which B&N splits off its eBook business (both hardware and eBooks) into a new venture, with Microsoft getting one sixth of that business (as yet unnamed).

To show that Microsoft is all heart, it is both dropping its suit, and also giving B&N a $300 million payment.  But in return, not only is it getting one sixth of the new company; it also will be getting a license fee on all future Nook Android based eBook readers.  With something like two million devices being sold a quarter at present, and perhaps an increase in this number in the future, Microsoft could be looking at over $100 million a year in license fees alone if all future eReaders remain Android based.

However, the new joint venture will also be releasing a new eReader that will be based on some type of Windows 8 (perhaps the phone version rather than the regular version).  Of course, Microsoft is in a happy ‘heads it wins/tails it doesn’t lose’ situation – it will get license fees from Android based Nook readers and also from Windows based Nook readers too.  Plus it gets entry into a new part of the marketplace – the burgeoning market for eReaders, something that until now it has had no direct slice of at all.

Well done Microsoft.  It wins on every part of this.  But what does B&N get?  A resolved lawsuit, an unexpected partner, plus an imperative direction to now develop a Windows based eReader, something that may or may not be a great idea.

So – you decide.  Fairytale wedding made in heaven?  Or horror story shotgun wedding from hell?

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