Why Does Microsoft Want the Nook?

Yesterday, software giant Microsoft (Nasdaq: MSFT  ) announced a $300 million investment in Newco, a subsidiary created under the banner of bookstore operator Barnes & Noble (NYSE: BKS  ) . The investment gives Mr. Softy a 17.6% ownership stake in Barnes & Noble's college bookstores and digital publishing operations. But let's call a spade a spade: This move is all about the Nook e-book reader.

You get what you pay for. Right?
This investment puts a $1.7 billion valuation on the Nook-centric section of Barnes & Noble. The bookstore's shares jumped as much as 105% on the news before retreating a bit. Even so, the entire company now holds a $1.2 billion market cap. With almost 10 times as much debt as cash on the books, Barnes & Noble's enterprise value is a bit larger at roughly $1.6 billion. Either way, that's far less than the implied value of the new digital operation.

Either the bookstores are worth less than zero, the markets have horribly mispriced Barnes & Noble, or Microsoft made a huge mistake here.

What's the point?
The first fruit of this relationship will be a Nook application for the Windows 8 platform. That sounds reasonable at first blush, but I think there's more to that new app than meets the eye.

Consider this: Barnes & Noble already provides a Nook reader package for today's Windows 7 machines. There are also Nook apps for Android smartphones and tablets, Apple Mac computers, the Apple iPhone, and -- count 'em -- two tailor-made iPad apps.

Windows 8 can run the old PC version. I'm sure the Windows 8 app will leverage the new Metro-style interface, making the Nook app look and feel like something from the newfangled Windows Phone world. But would that be a big enough deal to have both companies shouting from the rooftops?

I think not.

The real deal
Expect the Nook platform to gravitate closer to Microsoft from now on. After all, Redmond actually owns a good-sized slice of it.

Shutting iPad and Android support down altogether would not be a good idea, given their large market shares in the wild. You'd only end up chasing consumers away from the Nook altogether, either to Apple's iBooks or the Amazon.com (Nasdaq: AMZN  ) Kindle family. Microsoft didn't invest $300 million in the Nook just to kill it.

But the Windows 8 version should always be on the bleeding edge. New features and media formats will move slowly to other platforms. And I would not be surprised to see the next piece of Kindle hardware running Windows instead of Android. This is a sneaky way for Microsoft to seed its new software platform into the consumer market.

Will it help?
With this deal in hand, Microsoft now has two established brands operating like hyper-independent subsidiaries. The first one is, of course, phone maker Nokia (NYSE: NOK  ) , which installed former Microsoft executive Stephen Elop as CEO and then swore allegiance to Windows Phone. The Nokia Lumia 900 handset is trying to pave the way for greater Microsoft exploits, but it could use a bit of help. So here comes the Nook to establish Windows as a workable tablet platform.

So there you go; Redmond probably approached Amazon first, but the Kindle is already doing great under the wing of a financially stable company. The Nook is a different story. Barnes & Noble is getting desperate and had to mortgage the Nook to give the entire company a new lease on life.

This Hail Mary just might work, too. I wouldn't bet the house on it, though. Microsoft doesn't exactly have a stellar track record in consumer electronics. Failures like the Zune and the old Windows Mobile smartphone platform seem more common than Xbox success stories. Mr. Softy might still find a way to turn the winning Nook into a loser.

Amazon can still help you retire rich. I don't know that a Microsoft-backed Barnes & Noble can make the same claim.

Editor's note: This article has been updated to correct the calculation of enterprise value. The Fool regrets the error.

Fool contributor Anders Bylund holds no position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool owns shares of Apple, Microsoft and Amazon.com. Motley Fool newsletter services have recommended buying shares of Apple, Nokia, Microsoft, and Amazon.com and creating separate bull call spread positions in Microsoft and Apple. Motley Fool newsletter services have recommended writing puts on Barnes & Noble. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (7) | Recommend This Article (6)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 30, 2012, at 10:17 PM, normcf wrote:

    there is another slight gain from this. microsoft avoids a court battle in the android lawsuit case. Even if microsoft felt sure of winning, court cases are somewhat unpredictable. If microsoft lost, they would be in a very difficult position with the other OEMs that signed licensing agreements. Either microsoft lied to them, or they look stupid. microsoft get's a lot of revenue from those licenses, and makes their phone competition more expensive.

  • Report this Comment On April 30, 2012, at 10:38 PM, chillyfeez wrote:

    Did you really just say that MS doesn't have a stellar track record in consumer electronics? This is the type of bias-fueled commentary I've come to expect from the Fool. People like to point out the famous misses because they are the exception, not the rule. MS may be responsible for Zune, but have you forgotten that they have also basically created the home computer as we know it and are responsible for what is still the most successful family of operating systems (why is it that nobody ever mentions the Newton when discussing Apple's history)?

  • Report this Comment On May 01, 2012, at 7:29 AM, TMFZahrim wrote:

    @chillyfeez, operating systems and office suites hardly count as consumer electronics -- it's software. That's what Microsoft does well. I'm sure many Apple fans would disagree with the idea that MSFT created the home computer as we know it. Heck, my old Amiga was more like today's Windows computers than the early PC were, running DOS or Windows pre-3.1. And again, IBM did the hardware while Microsoft focused on software. I stand by my assertion that Redmond kind of sucks at consumer electronics.

    Anders

  • Report this Comment On May 01, 2012, at 8:07 AM, butthead2u wrote:

    Most people see failures as bad, however, failures are opportunities to learn, Zune for example is not dead, it's now in the phone. Microsoft is learning valuble information from it. I am confident that they learned alot from the phone fiasco as well! This is just the beginning, people said Microsoft didn't have a chance in the cosole wars too, but look how fast that is expanding. Once they tie all the pieces together you're going to be amazed at the ecosystem. You might as well buy a windows phone now, you're going to switch down the road anyway!

  • Report this Comment On May 01, 2012, at 11:42 AM, justd80010 wrote:

    I don't know how anyone can talk consumer electronics without mentioning Microsoft's Kinect - one of the most successful consumer electronic products IN HISTORY, having sold 10 million units in a 60 day period and putting that thing in places like hospitals that no one ever would have dreamed when it first hit the market. Hard to say Zune and Kin are the rule and Xbox and Kinect are exceptions. That's like saying New Coke is the rule and Sprite is the exception. All you're pointing out is that marketing to consumers has ups and downs. But, like Coke and Nike and Samsung, MS is, as a RULE, generally up. To say otherwise simply flies in the face of fact.

  • Report this Comment On May 01, 2012, at 11:51 AM, justd80010 wrote:

    @TMFZahrim - I'm sure Apple fans will dispute that anything worthwhile has ever been done by anybody besides Steve Jobs but he didn't event the personal computer either, he lifted the idea from engineers at Xerox. Ummm, MS doesn't really MAKE consumer electronics - they make the software that runs them... and that they do remarkably well with remarkable consistency. And when they DO consumer electronics they do them fairly well, Xbox and the Zune HD was awesome in both form and function. Saying Redmond sucks at CE when you have the Xbox and Kinect on the market is laughable. If a company marketed ONLY the Xbox they would be considered a success just on the strength single product alone.

  • Report this Comment On May 01, 2012, at 1:50 PM, marv08 wrote:

    @justd80010: First: Apple paid Xerox - not quite what "lifting" implies, second: Xerox did not have a "personal computer" Jobs could have "lifted" from them, they were experimenting with a mouse-driven interface but had no idea what to do with it (and actually never developed a product).

    The Xbox is a successful product now, it is still no particularly good hardware (noise, high failure rate, the epitome of ugliness) and MS had to write off billions of Dollars on it. So what do we have: Zune and KIN were megaflops, the Xbox is a money graveyard and MS's keyboards and mice are a disaster. Yeah, they suck at CE. Big time.

    ===

    @chillyfeez: MS has not created a single home (or other) computer ever, not "basically" and not otherwise. The first home computer, depending on interpretation, was either the Altair 8800 or the Apple II in 1977 - MS's first consumer-ready version of Windows (3.1) came in 1992... they have been first with nothing.

    ===

    Back to "why does MS want the Nook"... I guess the speculation here is that B&N (the core operation, not the subsidiary) goes down the drain, and MS can then snatch up the content deals on the cheap. It is certainly not about the Nook (a device running Android, and not powerful enough for Windows 8). There are enough supporters for Windows 8 tablets already (Dell, HP, Acer, Toshiba and certainly more), they all do know more about hardware than B&N and MS combined. What MS needs are tablet apps, but they would not need B&N for that; Amazon will certainly do a Windows 8 version of the Kindle software, they do software for almost any platform, as they make money on the content and lose money on the hardware - why would they boycott any OS?

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