When Microsoft (NASDAQ:MSFT) invested $300 million in Barnes & Noble (NYSE:BKS) for a 17.6% stake in the company's Nook business unit in October 2012, it seemed like the beginning of a partnership that could benefit both companies.
As recently as May 2013 the deal was going well enough that numerous media reports (including this one from TechCrunch) cited internal Microsoft documents that detailed a $1 billion offer the company was considering making for all of Nook. The documents also revealed that Nook Media planned to stop manufacturing its Android-based tablets by the end of its 2014 fiscal year. Those Nooks would have been replaced by third-party partner devices featuring Nook content. No specific plans were made for those to be Windows 8 driven, but speculation was rampant that Microsoft wanted to leverage its Barnes & Noble deal to launch a line of low-cost tablets running its new operating system.
However Microsoft never bought all of Nook and Barnes & Noble never entirely stopped making devices. Since then speculation has essentially been quiet on the Nook development front ... until Thursday when Samsung (NASDAQOTH:SSNLF) announced it had reached a deal with the bookseller to create co-branded tablets. This news comes just days after a Microsoft executive showed off a 7-inch Windows 8.1 tablet the company created working with Toshiba (NASDAQOTH: TOSBF).
Microsoft still has its stake in Nook but what once looked like a partnership with tremendous potential has resulted in nothing so far.
Why people thought Microsoft invested in Nook
At the time of the Nook investment Microsoft was launching Windows 8 and its Surface tablet. Since the Surface was a high-end device starting at $499 (with a snap-on keyboard making it even more expensive), there was much speculation that a Nook-branded Windows 8 tablet would allow the company to go after the bottom of the market without further angering its OEM partners.
The idea made sense and it would have allowed Microsoft to pursue the strategy it now appears to be following with other partners, but it never happened.
What is Samsung doing?
Despite the Microsoft investment Nook tablets have always been on Google's (NASDAQ:GOOG) Android platform. The co-branded Samsung Nook will be built on the Galaxy Tab 4 hardware platform and will feature customized Nook "software to give customers powerful, full-featured tablets that are designed for reading, with easy access to Barnes & Noble's expansive digital collection of more than three million books, leading magazines and newspapers," a Samsung press release explained.
The companies are expected to introduce the 7-inch Samsung Galaxy Tab 4 Nook in the United States in early August. The co-branded tablets will be sold at Barnes & Noble's nearly 700 bookstores across the U.S. and online at bn.com.
For Samsung this is a shrewd distribution deal that gives its tablets prominent placement in a retail chain which while struggling still generates a lot of foot traffic.
What does this mean for Barnes & Noble?
For Barnes & Noble Samsung has solved a problem many expected Microsoft to fix. The book chain does not want to make tablets (though it does still manufacture e-readers). Partnering with Samsung allows it to sell a machine that's a viable alternative to Amazon's (NASDAQ:AMZN) Kindle Fire line without paying to develop one.
For Barnes & Noble, Nook is a way to keep customers in its ecosystem (and away from Amazon's). The dedicated tablet facilitates digital purchases and the bookseller needs a lot more of those if it is going to survive.
In the third quarter of Barnes & Noble's fiscal 2014 the Nook unit (which includes digital content, devices, and accessories) had revenues of $157 million for the quarter, a decrease of 50.4% from a year ago. Device and accessories sales were $100 million for the quarter, a decrease of 58.2% from a year ago, due to lower unit selling volume and lower average selling prices. Most troubling is that digital content sales were $57 million for the quarter, a decline of 26.5% compared to a year ago.
The company blamed the decline on the fact that it did not introduce any new tablet products during the holiday season. That is almost certainly true and it highlights the desperate need for Barnes & Noble to get a new Nook-branded tablet to market.
What does this mean for Microsoft?
Microsoft spent $300 million investing in a company that it then did nothing with. The dollar amount is relatively trivial but the opportunity cost lost may be significant. Had Microsoft proceeded quickly with a Windows 8 Nook, it might be farther along in its battle to win/protect market share from Android. That device might look a lot like the co-branded Toshiba 7-inch tablet but it would have the advantage of Barnes & Noble's still considerable retail platform.
Good for everyone except Microsoft
Samsung and Barnes & Noble are clear winners here. The electronics-maker gets an added distribution channel while the book chain gets to offer its customers a top-tier tablet experience. Both companies should profit from the deal and the bookseller might be able to turn more of its physical retail customers into actual ones. In both cases that could mean taking sales from Amazon -- hardware in Samsung's case, and books, movies, and other content in Barnes & Noble's.
Microsoft let an opportunity pass here though oddly it can still profit due to its ownership stake if the Samsung deal helps the book chain mount a comeback. That's a small comfort when you consider what could have been.
Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Google (C shares). The Motley Fool owns shares of Amazon.com, Barnes & Noble, Google (C shares), and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.