Microsoft is pumping $605 million into Barnes and Noble’s digital book business, which is going to amount to a 17.6% stake in the company. This is a move by the technology giant to diversify its holdings and try to penetrate a growing and still relatively new industry.
The biggest challenge facing this new partnership is that the Nook has been taking a back seat to other competitors such as Amazon and Apple. The Nook’s current condition is that it holds approx. 27% of the e-book title sales, which is less than half of Amazon’s which claims 60%. The proceeds from this infusion of capital are to provide “an aggressive expansion program to take the Nook international”, said William Lunch, Barnes & Noble’s CEO. Going international is vital because the American market is relatively saturated when it comes to e-readers and would be hard for the Nook to try to catch up and dominate. However internationally, if it can play catch-up and surpass its competitors, it could be similar to KFC’s international success (which is now one of the largest chains inChina).
This partnership is not limited to only having Barnes and Noble being capable of creating e-readers…the two executives of each company said that in the future the nook may be running Microsoft’s OS and perhaps Microsoft would even producing e-readers. This a huge level of integration, because Microsoft has typically avoided branching out into creating hardware, aside from the Xbox…but this move could turn out to be a huge payoff.
By no means is this the first time Microsoft has sought to muscle its way into another industry. Microsoft has been pushing to go beyond its software beginnings and has been tapping into the $60 billion of cash it has been accumulating. Microsoft also pursued a partnership with Yahoo, which brought about Bing, and committed to the acquisition of Skype, for $8.5 billion last year. Both of these moves have had mixed results…Bing is not gaining any search market shares, while Skype is showing potential but hasn’t become a sensation (especially now with Google’s new hangout product). Regardless of the new ventures, Microsoft still generates over 85% of its revenues from software and services.
Barnes and Noble is an established brand name and at one time dominated the book market. The time is now for this company to catch up in the e-reader market and take the next step internationally. Fortunately Microsoft sees this as an opportunity, because if it weren’t for the capital commitment I think Barnes and Noble would be facing a similar fate to that of many other conventional bookstores, and ironically for these book stores the first word is “chapter”.