Microsoft Is Asking for Pain

Desperate times call for desperate measures.

Almost exactly a year ago, Microsoft (NASDAQ: MSFT  ) and Barnes & Noble (NYSE: BKS  ) announced that they were forming a strategic partnership in the bookseller's Nook business. In exchange for $300 million, Microsoft would get a 17.6% stake in the newly formed subsidiary of B&N, valuing it at $1.7 billion.

The deal was part of a settlement between the two companies, since Microsoft had been hounding Barnes & Noble over Google (NASDAQ: GOOGL  ) Android-related royalties. B&N would release a Nook application for Windows 8, and Microsoft would get more exposure to the tablet market.

Well, the Nook business ain't doing so hot right about now. Barnes & Noble effectively just surrendered its tablet ambitions to Google by embracing the officially sanctioned Android ecosystem. In doing so, B&N is implicitly throwing in the towel with trying to operate its own separate content ecosystem, opting for the easy way out by adding Google Play and all of Google's most popular services to its Nook lineup.

Barnes & Noble admitted last quarter the Nook unit sales were weak, driving the segment's revenue down 26%. The bookseller has launched various promotions to clear out inventory.

TechCrunch now reports that Microsoft is contemplating buying out the entire Nook business from B&N, which would inevitably result in nothing but pain. Some internal documents say that Microsoft may offer $1 billion to buy the digital assets of the Nook subsidiary, and that Nook hardware sales are to be shuttered by the end of fiscal 2014, in line with a New York Times report in February.

Instead, Nook would transition toward becoming a content platform for third-party devices, which makes absolutely no sense strategically in the context of adopting Google Play. It's like saying, "Our content ecosystem is doing terribly, so we're giving up, but let's do our own content ecosystem!"

The leaked docs reportedly value Nook at $1.66 billion. In December, publisher Pearson bought in to Nook for $89.5 million, enough to grab a 5% stake that valued Nook at $1.8 billion. These are the current owners and their current stakes in Nook.

Company

Stake

Barnes & Noble

78.2%

Microsoft

16.8%

Pearson

5%

Source: Barnes & Noble.

What "digital assets" could Microsoft possibly be interested in? The content side clearly isn't doing well. Microsoft has its own Windows Store and Xbox Live content storefronts. Nook hardware sales are dropping, while Microsoft is ramping up Surface. Overall, the Nook brand isn't particularly powerful, either.

Hasn't Microsoft learned its lesson with overpaying for dubious acquisitions?

It's been a frustrating path for Microsoft investors, who've watched the company fail to capitalize on the incredible growth in mobile over the past decade. In a new premium report on Microsoft, a Motley Fool analyst explains that while the opportunity is huge, so are the challenges. The report includes regular updates as key events occur, so make sure to claim a copy of this report now by clicking here.


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Comments from our Foolish Readers

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  • Report this Comment On May 09, 2013, at 8:43 PM, monev60 wrote:

    Hahaha! I guess the Fools did not see this coming. The author of this article could almost say: "Please don't buy it, because we've shorted it".

    Anything that makes BKS going up, will trigger articles like this.

  • Report this Comment On May 09, 2013, at 10:02 PM, doawithlife wrote:

    *I am clueless as to what is going on-as I have about 0 facts*

    Could this be an attempt to get the store space MS has been craving. Instead of buying B&N(which was a previous rumor) they do some sort of deal where they sell a Surface Pro 'Nook' in B&N stores? There by getting the availability MS desires for their hybrid tablets without the cost and/or risk.

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10/24/2014 3:59 PM
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