What Microsoft Got In The Nook Deal

| About: Microsoft Corporation (MSFT)

Investors in Barnes & Noble (NYSE:BKS) reacted far more positively to Microsoft's $300 million buy-in with Nook than did Microsoft (NASDAQ:MSFT) shareholders.

Perhaps rightly so. Microsoft values the Nook business at $1.7 billion. Put that next to the $268 billion Microsoft itself is worth and you have sofa cushion money. And please note that MSFT is not buying into BKS but a "new unit" dubbed Newco that will own the Nook business.

But this deal could provide more than a lifeline to users of the Nook, who feared they might have gotten an orphan given the huge success of Amazon.Com with its Kindle line.

It could also provide Microsoft two things it really needs going forward.

  1. A Digital Reader Platform

  2. A Channel

It's this last item that's the key. BKS dominates college book retailing. Most colleges turned their book stores over to BKS years ago, and they're important hang-outs. (Starbucks' coffee bars have also replaced the old beer hall, grandad.)

With all the hullaballoo going on over whether Amazon.com (NASDAQ:AMZN) or Apple (NASDAQ:AAPL) has the monopoly on e-books, the fact is BKS is the channel, and Microsoft has bought into that channel without actually having to, you know, buy into it.

One more key benefit. The deal ends Nook's holding-out on Microsoft's Android licensing demands - the company has been going after Linux distributors for six years (including Android) demanding fees to cover its patents. Having high profile hold-outs on that jihad is embarrassing. Better if everyone pays. Then no one has to see what you're actually claiming to protect - that was embarrassing.

Overall, this is a deal that makes Microsoft much more competitive in key demographics, that ends embarrassing patent litigation, that could lead into a takeover of BKS down the road, and that cost very little cash.

That's a good deal.

Disclosure: I am long MSFT, AMZN, AAPL.

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