I love being an observer of the Tech Wars (and no, I don't mean the book written by William Shatner). Everything can change in an instant. On Tuesday, I wrote an article discussing the strategic implications of Barnes & Noble's (NYSE:BKS) Nook HD and HD+ tablets being opened up to the Google (NASDAQ:GOOG) Play store (the devices having previously been a closed Android ecosystem). To summarize, I described the event as a significant win for Google (GOOG), a mixed bag for Barnes & Noble (BKS) and a loss for Microsoft (NASDAQ:MSFT). Google got a million potential new Google Play customers and advertisement eyeballs, Barnes & Noble's tablet offering had a chance of gaining new customers thanks to its newfound apps (10,000 native Nook apps expanded to 700,000 Google Play apps) and Microsoft lost because of 1) Google's gains, 2) it made it look foolish, since it owned a 16-17% stake in the company and Barnes & Noble was cozying up to Google, and 3) it forced its hand. Microsoft's options, as I saw it, were to hold its stake and pout, pout and sell its stake (most likely at a loss, seeing as the Nook project has been a perennial money loser) or buy out the Nook Media subsidiary and nip a potentially viable Android table maker in the bud.
Well, if a Wednesday night report from Tech Crunch is correct, it didn't take long for Redmond to make a choice. Microsoft is supposedly offering $1 billion to buy out Nook Media (which includes the Nook tablet division, the Nook e-book store and Barnes & Noble's college book store business), minus the college book stores. If it's a false rumor, it's a rumor that seems more likely than not. So, let's assume that it's true and think through the implications.
I won't be talking much about Google this time around because this doesn't change the game too much for it. Google, much like Microsoft, doesn't care whose devices run its operating system, since it profits either way [unless someone like Amazon (NASDAQ:AMZN) creates its own pet Android ecosystem]. Google still benefits from Nook tablets being opened up to Google Play. It will also benefit from what I foresee as an inevitable fire sale of these tablets as Barnes & Noble tries to put the whole failed Nook experiment behind it, since Google, again, profits no matter how much it sells for. The fire sale is already in effect, with the larger Nook HD+'s price being slashed from $269 or $179 as part of a Mother's Day sale. In fact, after the Nook HD's disastrous launch, the tablets (especially the 9 inch HD+ models) have rarely been available without some sort of promotion or deep discount. (Source: my e-mail inbox, constantly, since December).
For Barnes & Noble, this is huge. It has a much better shot at ultimate survival now, since its profitable brick and mortar book stores aren't tethered to a cash burning tablet business (which in the age of Amazon and the iPad, seems like SUCH a bizarre sentence to type). Also, a cool billion dollars will fund just about anything Barnes & Noble wants to do. It could pay off debt, do some mergers and acquisitions, start paying a dividend, finance the deal to go private, build a solid good commode for the executive washroom, etc. The sky's the limit, because the Nook business was just sold for an amount just shy of Wednesday, May 8's total Market Cap for the entire company. If you're a Barnes & Noble shareholder, bravo; your best case scenario just happened.
So, on to the main event: what about Microsoft? This is a great step for it. Even the availability of Google Play on Nook tablets has a silver lining for Microsoft: it will help it unload tablet inventory quickly. Nook Media is also a perfect fit for Microsoft's app ecosystem needs. I had been mulling an article where I would discuss possible acquisitions that Microsoft could make that would help it extend its tentacles into other phone and tablet ecosystems while strengthening Windows 8, and Nook Media was high up on the list. Nook is an ecosystem with several million users that's already present on all of the major mobile platforms. The app could also, very easily, be included pre-installed on every Windows 8 PC, phone and tablet going forward, the same way that X-Box Video and Music are. (On a side note, I hope this finally makes Microsoft and/or Nook Media get off its rear and make a Nook app for Windows Phone). The buyout could also help get publishers interested in releasing more books in Nook format, since there are tens of millions of Windows 8 users who are potential customers. More releases could only help Microsoft and its new Nook subsidiary in the long run.
To swing back to the tech Game of Thrones strategic posturing for a moment, this also means that Kindle e-book sales on Windows 8 devices could take a hit. Customers will often take the path of least resistance. For instance, if you own an iPod, synching music is easier if you buy the music through the iTunes store; the prices are usually the same as they are through Amazon and other services, so why buy music from more than one store? Similarly, if a customer with a new Windows 8 laptop wants to read an e-book, and they see that they can use the Nook store preinstalled on their PC using the credit card already associated with their Microsoft account, then finding and downloading the Kindle app becomes a nuisance. This is good news for Mr. Softy; since e-books have no physical cost, whatever money Microsoft's Nook app makes will be almost pure profit.
Unlike my last article on Nook drama, I am going to conclude that this time every company who is directly involved wins. Google gets its spike in Google Play users, Barnes & Noble just won the lottery and can focus on what's working, and Microsoft just got a pet e-book store. The only major corporate loser (aside from manufacturers of Nook accessories) is Amazon, who just earned itself a cross-platform competitor in e-books who has deeper pockets than it does. I don't think that the Nook store will ever truly rival Amazon's e-book popularity, but Microsoft is a much more daunting opponent than Barnes & Noble ever was. It needs to stay on its toes.
The biggest losers here are, in the long term, users who bought a Nook HD at full price. It's a perfectly fine tablet, but it's now an orphaned product line a mere six months after launch. Google Play will bring it up to the specs of a regulation Android tablet, but there's no way that Microsoft will continue producing Android tablets going forward, and making Nook Tablets with Windows RT or 8 in house would be a distraction from its Surface line. Nook HD is the end of the line for the physical Nook, aside from stated plans to keep producing e-readers until that market finally dies out (see the Tech Crunch article). I imagine that the last Nook product will be an e-reader sitting in the corner of a Microsoft retail store. As a loyal Barnes & Noble customer whose first tablet was the ever so creatively named Nook Tablet, it's a sobering reminder of just how quickly the technology game changes.
Disclosure: I am long MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.