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Microsoft Makes $300M Investment In New Barnes & Noble Subsidiary To Battle With Amazon And Apple In E-books

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Barnes & Noble has found a new, major partner in its fight to get an edge over Amazon and Apple in the market for e-books and the devices being used to consume them: it is teaming up with Microsoft in what the two are calling a strategic partnership, name yet to be determined.

It will come in the form of a new subsidiary of B&N that will include all of its Nook business as well as its educational College business. Microsoft is making a $300 million investment in the subsidiary, valuing the company at $1.7 billion in exchange for around 17.6 percent equity in the subsidiary.

The news leaves the door open for B&N to eventually spin these off into a separate business altogether — or even sell them to Microsoft. And it leaves a load of questions about what B&N will do next with the Nook, which is currently built on a forked version of Google’s Android platform.

The new company, referred to for the moment as Newco, will contain B&N’s digital business, as well as its College division. While Microsoft will take 17.6 percent, B&N will own 82.4 percent of the venture.

This is a key way of getting more content on to the Microsoft platform — specifically e-books content to ensure that its Windows 8 tablets will be able to compete not only against the best-selling iPad but also the Kindle Fire from Amazon, along with the rest of the company’s e-readers. The Kindle Fire has stolen a march among Android tablet makers and part of the compelling offer is not only the low price ($199) but also the fact that it contains so much content, including seamless access to all of Amazon’s e-book offerings.

This is also a progression — a very big one — of the funding etudes that Microsoft has been making to developers to make sure they are making apps for Windows Phone. It’s a way of getting more content on its two mobile platforms — which, it can be argued, may have come too late to the market. The first product to come out of the door of Newco? A Nook application for Windows 8, the companies say.

And given that education has been one of Apple’s bigger pushes this year, and the obvious and close links between education and e-reading, it’s not too surprising to see that B&N has also put its College division into this subsidiary.

Microsoft, too, has been courting the education market — inking its biggest-ever cloud-services deal in the education sector earlier this month. Nevertheless the pair have a long road ahead of them. In January, Apple noted that there were already 20,000 educational apps for iOS and that there were already 1.5 million devices deployed in schools, numbers that will inevitably have grown in the last 4-5 months with the launch of the new iPad and numerous initiatives to spread the tablet in the educational sector.

And there is a legal twist to the deal, too: the two companies say they have definitely sorted out their patent litigation now: “Moving forward, Barnes & Noble and Newco will have a royalty-bearing license under Microsoft’s patents for its NOOK eReader and Tablet products,” the two write in the release below. If Microsoft doesn’t use this as an opportunity of possibly persuading B&N to swap over to Windows 8 for a version of the Nook, it will also give it a very interesting inroad into developing more for Android.

As for B&N and the future of these products… this deal looks like it could potentially pave the way for B&N to spin off this business into its own standalone operation, if not into the waiting arms of Microsoft itself — long speculated to be looking at ways of gaining a stronger foothold in the area of mobile devices to better implement its bigger strategy. The idea of a subsidiary was something that B&N had first floated back in January, when it noted that it was weighing up how best to separate its digital business to “maximize shareholder value.”

There are many more questions — such as what this could mean for the company’s broader strategy for growing the market for the Nook (international being a key push that the company has yet to make, apart from some baby steps); and how well, exactly, those products are doing for the company: IDC puts the Nook’s share of the tablet market at just 3.5 percent.

The company is holding a conference call on the deal later today and we’ll update as we learn more.

Full press release below.

New York, NY and Redmond, WA (April 30, 2012) – Barnes & Noble Inc. (NYSE: BKS) and Microsoft (NASDAQ: MSFT) today announced the formation of a strategic partnership in a new Barnes & Noble subsidiary, which will build upon the history of strong innovation in digital reading technologies from both companies. The partnership will accelerate the transition to e-reading, which is revolutionizing the way people consume, create, share and enjoy digital content.

The new subsidiary, referred to in this release as Newco, will bring together the digital and College businesses of Barnes & Noble. Microsoft will make a $300 million investment in Newco at a post-money valuation of $1.7 billion in exchange for an approximately 17.6% equity stake. Barnes & Noble will own approximately 82.4% of the new subsidiary, which will have an ongoing relationship with the company’s retail stores. Barnes & Noble has not yet decided on the name of Newco.

One of the first benefits for customers will be a NOOK application for Windows 8, which will extend the reach of Barnes & Noble’s digital bookstore by providing one of the world’s largest digital catalogues of e-Books, magazines and newspapers to hundreds of millions of Windows customers in the U.S. and internationally.

The inclusion of Barnes & Noble’s College business is an important component of Newco’s strategic vision. Through the newly formed Newco, Barnes & Noble’s industry leading NOOK Study software will provide students and educators the preeminent technology platform for the distribution and management of digital education materials in the market.

“The formation of Newco and our relationship with Microsoft are important parts of our strategy to capitalize on the rapid growth of the NOOK business, and to solidify our position as a leader in the exploding market for digital content in the consumer and education segments,” said William Lynch, CEO of Barnes & Noble. “Microsoft’s investment in Newco, and our exciting collaboration to bring world-class digital reading technologies and content to the Windows platform and its hundreds of millions of users, will allow us to significantly expand the business.”

“The shift to digital is putting the world’s libraries and newsstands in the palm of every person’s hand, and is the beginning of a journey that will impact how people read, interact with, and enjoy new forms of content,” said Andy Lees, President at Microsoft. “Our complementary assets will accelerate e-reading innovation across a broad range of Windows devices, enabling people to not just read stories, but to be part of them. We’re at the cusp of a revolution in reading.”

Barnes & Noble and Microsoft have settled their patent litigation, and moving forward, Barnes & Noble and Newco will have a royalty-bearing license under Microsoft’s patents for its NOOK eReader and Tablet products. This paves the way for both companies to collaborate and reach a broader set of customers.

Newco,

On January 5, Barnes & Noble announced that it was exploring the strategic separation of its digital business in order to maximize shareholder value. Barnes & Noble is actively engaged in the formation of Newco, which will include Barnes & Noble’s digital and College businesses. The company intends to explore all alternatives for how a strategic separation of Newco may occur. There can be no assurance that the review will result in a strategic separation or the creation of a stand-alone public company, and there is no set timetable for this review. Barnes & Noble does not intend to comment further regarding the review unless and until a decision is made.

Additional information will be contained in a Current Report on Form 8-K to be filed by Barnes & Noble.

Barnes & Noble and Microsoft will host an investor call and webcast beginning at 8:30 A.M. ET on Monday, April 30, 2012. To join the webcast, please visit: www.barnesandnobleinc.com/webcasts.


Microsoft Makes $300M Investment In New Barnes & Noble Subsidiary To Battle With Amazon And Apple In E-books

Barnes & Noble Incorporates In Germany, Closest Sign Yet Of European Nook Launch

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Just as Amazon is launching a new versions of the Kindle in Europe (but not the Fire tablet, yet), one of its big competitors is taking one more step in its bid to enter the European market: Barnes & Noble has incorporated a new company, Barnes & Noble Digital Media GmbH, in Germany.

B&N incorporated the German company on March 15, just around the time that the U.S. company came to London to promote the Nook to developers.

Apart from the fact that having a digital presence is essential for any bookseller looking to take a piece of growing revenues for e-books, expanding outside of the U.S. market is crucial for B&N if it wants to get more scale for the Nook — an important part of attracting more developers to the ecosystem and also improving its margins on the tablet. Currently the Nook only has around a 3.5 percent share of the market, according to IDC.

According to a report in the German-language Buchreport (Google translation here), the company will be based in Berlin. The report says that Eugene DeFelice will be running the operation; according to this Reuters profile, he is currently the VP, general counsel and corporate secretary of the company. It’s not clear whether this is an interim or permanent appointment.

When B&N hit London last week for its developer event, many came away from the sessions, on building for the Nook platform, with the sense that the idea of pitching to European developers was not yet fully formed. For starters, billing requires U.S. bank accounts, and getting paid for your apps would only be in U.S. dollars.

During the event, the company would not confirm whether the event was organized in the lead-up to launching its Nook tablet on this side of the pond. B&N’s director of developer relations, Claudia Romanini, said that there was no intention of opening B&N stores abroad — another reason it might partner with local companies to launch something, since she also noted that a key part of Nook marketing was around in-store promotions.

Indeed, there have been rumors swirling for months now that B&N will partner with large booksellers here to move ahead on such a strategy. In the UK, many believe its partner will be Waterstones, which has both spoken glowingly of the Nook, and has said it will be launching its own tablet later this year.

In Germany, Buchreport notes that there are several strong incumbent players, including Thalia and DBH, and these could be potential partners. Moreover, B&N already has a partnership with German bookstore aggregator BookWire.

But as with the UK, Barnes & Noble will be entering a crowded market; both Amazon and Apple are already doing very well over in Germany. A survey from the University of Hamburg noted that 57 percent of respondents had purchased books from Amazon, while 27 percent from Apple’s iBookstore.

In the Netherlands — another key market for B&N, and an obvious way of extending much of its current content given that so many there speak English — the bookseller reportedly in line for a partnership is Centraal Bookhuis.

[H/T to @arhomberg]


Barnes & Noble Incorporates In Germany, Closest Sign Yet Of European Nook Launch

If Barnes & Noble Wants To Take Its Nook Tablet Abroad, It Has A Lot Of Work To Do

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An enlightening and frustrating evening in equal measure this evening in London, where Barnes & Noble sponsored a Nook developer event and panel discussion on the state of the tablet market.

The bookseller is definitely planning to launch its tablet outside of the U.S. — the company has confirmed as much, and the fact that they’re here in London attests to that — but after a developer event at Mobile Monday London very light on details, the takeaway from several app makers was that a lot more work needs to be done before B&N will be able to make a credible entry into the market here.

On the plus side, the company’s director of developer relations later gave some enlightening numbers on who it is that is using those devices in the U.S.

In packed room, Barnes & Noble’s director of developer relations, Claudia Romanini, took the audience through some of the basics of developing apps for the Nook tablet. In attendance, a lot of Android developers. Afterwards, we caught up with a couple to gauge their feedback: in short, they were a bit perplexed on why B&N held the event in the first place, given how little they are able to offer at the moment in terms of information:

Major focus around U.S. market, for now, is completely unfriendly to doing business abroad. Consumers currently need to have U.S. credit cards in order to purchase apps. Meanwhile, developers do not need U.S. bank accounts in order to get paid, but they will still be paid by check, in U.S. dollars. And one developer who won a Nook in the raffle after the event told me that he’ll need to pay an import tax if he hopes to get the device eventually. (“They could have brought it over with them today. Why do I have to pay for my prize?” he asked.)

There are no details on when the tablets will go to its first non-U.S. market, but we do know that they will not be sold through Barnes & Noble stores. Specifically, Romanini said: “We’re expanding our digital business, but not our stores.”

In the U.S. the physical stores have been an instrumental part of the company’s marketing of the tablets: apps and e-books are free to use and read in the stores for an hour, and there are tables to sample tablets; the stores also market specific apps.

There have been many rumors that Barnes & Noble will partner with UK bookseller Waterstones, which has said it would launch a tablet this year. Its CEO has even described how it could mimic the model laid out by B&N by leveraging its physical stores to promote the devices. However, neither B&N nor Waterstones has confirmed this plan, and Waterstones doesn’t have a similar kind of “hangout” feel in their retail locations.

Lack of functionality. There are still no in-app payments, or in-app advertising, available for apps on the Nook. This is partly why paid apps have done well but also cuts out a big part of the business model used by developers here — especially since the in-store app usage, at this moment, would not apply here because B&N is not opening stores here.

Low number of apps. Two developers told me they thought that Romanini’s characterization of the number of apps in Nook in the “thousands” — not tens or hundreds of thousands; just thousands — was alarming: yes, it means more visibility/less crowding for the apps that are there, but goes very much against the ethos of an active marketplace.

For all the vagaries of the developer event, Romanini then delivered on some pretty amazing specifics on how the Nook is doing in the U.S.

She says that B&N has sold “millions of units” of the Nook. How does that work out in market share? IDC estimates that the Nook tablet accounted for 3.5 percent of all tablet shipments in Q4 2011, compared to the 54.7 percent held by the iPad from Apple and the 16.8 percent taken by the Kindle Fire in its short time on the market. The Nook is currently selling for $249 for its highest-range device.

She noted that at the moment “over 70 percent” of buyers of the Nook tablet are women aged between 25 and 45. They live within 15 minutes of a B&N store and often have kids. “When you go in, you can see kids running around loose in the store,” she said, adding that the stores have special, short tables for those little ones to try out apps.

“We are very focused on families and children,” she continued, and she says they know their tablet customer so well they have given her a name: Julie. “We know what Julie would like to buy and how to approach her.”

She says that “Julie” does not like to consume apps on phones because she is “a bit afraid of data consumption,” and because of that B&N has found a good way to market apps to her: by making them free when she is in the store to try them out. This, she calls, “approaching the device from a content perspective.”

She says that because of this mother/female focus, and the fact that the Android Market (now Google Play) is not very strong on female apps, B&N has put a big emphasis them in its Nook app store.

One-third are children’s and education apps; one-third are games; and one-third are lifestyle apps covering areas like fashion, food, health, fitness and travel. “Basically, anything that would interest a woman,” she said.

Great information, but will B&N try to use some of it in its global push? With no details to link up the two sides of the evening, our screen on that one remains dark.


If Barnes & Noble Wants To Take Its Nook Tablet Abroad, It Has A Lot Of Work To Do

IDC: Apple’s iPad Rules Tablet Sales Today But Android Makers Will Overtake It By 2016

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With news of Apple’s new iPad selling out its first run due to overwhelming demand, 2012 is off to a galloping start for the tablet market; and because of that IDC is upping its forecasts for how many “media” tablets will be shipped this year. The analysts predict that the number will top 106.1 million units, up from their previous forecast of 87.7 million units, due in part to strong demand for that new iPad, but also a number of other devices at a range of price points.

Indeed, while Apple will continue to be the single biggest tablet maker on the market, Android, collectively, will continue to hold its own against it, with some notable devices like the Amazon Kindle Fire doing particularly well. But it will not be until 2016 — four years from now — that IDC thinks that Android shipments will outnumber those of iOS.

Even though the Kindle Fire was available only in the U.S. in Q4, IDC says that the $199 device accounted for 16.8 percent of all tablet shipments in Q4 2011, or some 4.7 million units, making it the largest “Android” vendor. Samsung, despite its multiple Android tablets, was bumped down to second-biggest Android maker with a 5.8 percent share of the market. Barnes & Noble and Pandigital, the other top Android tablet makers, both saw their shares of shipments slide. The tablets to watch, it seems, are those that combine low price with high content promise.

None of that was a match for Apple, however, which accounted for 54.7 percent of all shipments in Q4, or 15.4 million units. While that was a rise of 110 percent over the year before, that still did not outpace the overall growth of the tablet market, which IDC says grew by 155 percent between the two quarters. Overall, Android tablets accounted for 44.6 percent of all sales, while RIM’s PlayBook slipped down to 0.7 percent from 1.1 percent a year before.

A couple of things worth noting about IDC’s numbers, taken from its quarterly tablet and e-reader tracker:

Although many predict that e-readers will eventually die a death blow dealt by tablets, for the moment their fortunes look okay. They grew less than half as well as tablets did — up by 64.3 percent between Q4 2011 and 2011 — but they are still on the rise, with e-reader makers like Amazon, Barnes & Noble and Kobo in total shipping 10.7 million units in the quarter.

IDC gives no weight to Microsoft and its new, tablet-friendly Windows 8 platform in its “media tablet” forecasts. As we saw last month, there are a number of devices being built on the OS, and if you believe all the reports, there will be more coming from the likes of Nokia to add to that. These are not expected to start shipping in earnest until much later this year. In its forecast, “others” apart from iOS and Android account for only a tiny sliver of overall shipments — and, by default, sales.

And that’s the other point always worth remembering about shipments. This tends to be the metric tracked most closely by analysts, because they get their numbers from device makers but also the channels that receive and distribute them; the shipment numbers are based on estimated demand. Ultimately, though, sometimes these shipments are out of sync with how a product actually gets bought — although analysts usually say that in the long run those corrections are accounted for with fewer shipments in subsequent quarters.


IDC: Apple’s iPad Rules Tablet Sales Today But Android Makers Will Overtake It By 2016

Forrester: No Android Tablet Has More Than 5% Share vs iPad. How Does Amazon’s Kindle Fire Compare?

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On the eve of what may well be the launch of a brand new iPad from Apple comes some new analysis from Forrester Research on the current competitive landscape in tablets — or lack thereof, as the case seems to be.

In short: despite the rush of tablets that have come out in the past year, many built on Google’s Android OS, Apple has managed to continue to run away with the competition, and how has 73 percent of the tablet market. No Android tablet maker, it notes, has more than a five percent share against it.

There is a caveat to Forrester’s research, however.

Forrester carried out its market research last September, before Amazon had started to sell its Kindle Fire tablet, and before Barnes & Noble had released its own tablet to compete against that. These devices have proven to be forces in the market, and are already having an impact on sales of another device in the food chain, e-readers. (More on that below.)

Both Amazon and Barnes & Noble also use Android — albeit versions that have been customized and are no longer on Google’s upgrade track (and service track) as a result.

In Forrester’s analysis, Samsung has a five percent share; Motorola four percent and Acer a three percent share. HP’s TouchPad, now discontinued, had a six percent share, but that was during that series of crazy fire sales when everyone suddenly rushed to buy one.

So how would those numbers look with the $199 Kindle Fire in the mix? Unfortunately we still don’t know exactly: the last numbers that the company released were during its last quarterly results at the end of January, but even these were not concrete. Amazon said that sales of its Kindle products, including the e-readers, had grown 177 percent over the last year and that the Kindle Fire was the bestselling among them.

But others have parsed those numbers and have come up with their own sales estimates.

Mobile analyst Chetan Sharma tells me that he believes that Amazon sold around four million Kindle Fire tablets in 2011. That would put it behind his estimates for Samsung, at six million, for the full year.

But in the holiday quarter alone (the only quarter when the Kindle Fire was actually shipping to customers), Sharma believes Amazon would have come in second place to Apple, which reported that it sold 15.43 million iPad tablets. Others have guessed that Amazon sold more like six million Kindle Fire tablets.

If you trust Forrester’s guess on these things, the role that companies like Amazon will play in the tablet market will continue to grow because of two reasons: price and content.

Although many Android tablets, such as Samsung’s Galaxy line or Motorola’s Xoom, have been launched with media services in an attempt to punch at the same weight as Apple, it seems that the offerings are not good enough to justify the prices, which have been on par with Apple’s iPad.

Amazon has made content a focus of its tablet, too, but at a much lower price point. That’s made the whole product significantly more attractive. Quoted in Bloomberg, Forrester analyst Sarah Rotman Epps notes: “Tablets are about services. That is where Amazon has succeeded where others have failed.”

E-reader effect. Amazon’s Kindle Fire might not yet be denting Apple’s share by too much, but one area where it seems to be having more of an impact is on e-readers. Some research from DigiTimes estimates that shipments of pure-play e-reading devices will be down to only two million units this quarter, compared with nine million in the same quarter a year ago. It says this is down to the “substitution” effect of people opting for products like the Kindle Fire instead.

That kind of cannibalization, to be honest, seems only to spell good news for Apple, as it means that more people are looking for devices that are bigger than smartphones, yet still portable, but are loaded up with more features than an e-reader: that’s a market where Apple has consistently set the bar.

It’s still a market that is wide open for change: Forrester believes that by 2016, only about one-third of U.S. adults will own an iPad, and that’s before even considering what might happen in other markets.


Forrester: No Android Tablet Has More Than 5% Share vs iPad. How Does Amazon’s Kindle Fire Compare?