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He’s not heavy

30 April 2012 By Robert Cyran

Microsoft has given Barnes & Noble a big brother lift. The bookseller’s Nook e-book reader ambitions looked a day late and many dollars short. Microsoft’s $300 million injection changes that and is more than a one-time hand up.

Barnes & Noble said in January that it might separate its fast-growing Nook business from its ailing bricks-and-mortar stores. Figuring out how to do the split wasn’t straightforward, however. The online division, which bears the cost of developing the Nook, lost $102 million last quarter. Moreover, e-reader sales are heavily promoted in stores.

The new agreement with software giant Microsoft carves a trail. The software giant gets a 17.6 percent stake in the company’s Nook and college business units, valuing that part of Barnes & Noble at $1.7 billion. The book retailer’s entire market capitalization before the deal was unveiled was less than half this figure.

The Nook is gaining customers and now has almost 30 percent of the e-book market. Microsoft’s cash, and revenue guarantees for several years, provide the financial resources to go additional rounds against rivals like Amazon and Apple. But Barnes & Noble’s new big brother is also going to put the Nook app on devices running its newest operating system, Windows 8, which is due out later this year. That’s a big potential boost.

It’s no surprise Barnes & Noble’s shares popped more than 60 percent on the news. But it’s worth noting the whole company’s value, even after adding back $100 million of long-term debt, is still below the valuation implied by Microsoft’s investment in part of it.

One worry is competitive, even with extra cash in Barnes & Noble’s pocket. Apple and Amazon have far more, as well as formidable market clout in e-readers and e-books. Apple is focused on the textbook market, too. On the technological front, Barnes & Noble could face pressure to risk switching the Nook from Google’s Android operating system to Microsoft’s. And the declining high-street store business will continue to dwindle, to the sadness of fans of real bookstores.

All that means Barnes & Noble’s struggles aren’t over. But the Microsoft deal does bring the company time, capital and a path to follow.


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