News

Microsoft Invests $300 Million in Barnes & Noble Subsidiary, Litigation Settled

• By Kurt Mackie
• 04/30/2012

Microsoft plans to invest $300 million in a Barnes & Noble subsidiary, the two companies jointly announced today.

The deal also marks the conclusion of the companies' year-long intellectual property legal dispute. Microsoft had sued over alleged violations of its patents with regard to software technologies used in Barnes & Noble's Linux-based Nook electronic reader devices. The companies settled the dispute without a public ruling from the commissioners at the U.S. International Trade Commission, where the legal venue was lodged.

Under the proposed deal, Barnes & Noble plans to create a subsidiary, tentatively named "Newco," to handle its consumer and college digital business matters, although the subsidiary will have "an ongoing relationship" in some way with the company's retail store outlets, according to a jointly released statement. Microsoft's investment will give it a 17.6 equity stake in the subsidiary, while Barnes & Noble will control 84.4 percent.

The two companies also are collaborating on Microsoft's Windows 8 operating system, planning future integration with Barnes & Noble's Nook devices. The proposed deal doesn't change the Nook's overall platform support, however, which apparently still includes using Android.

"If you want to read your book on an Android or iOS product…you of course can do that," said William Lynch, Barnes & Noble's CEO, in an April 30 conference call with financial analysts.

Andy Lees, Microsoft's president, said during the conference call that Barnes & Noble will be working on a Windows 8 app for the Nook devices.

Lynch responded to an analyst question about whether the Nook would be able to handle Windows 8. He said that the Nook currently runs on a Texas Instruments 1 GHz processor and that Microsoft has stated its intention to have Windows 8 run on ARM processors, including chips built by Texas Instruments. Beyond that comment, Lynch didn't clarify the technical details.

The two companies agreed to the deal after settling a rather bitter legal dispute over the Nook's Android use. Microsoft had alleged that the devices, built by Barnes & Noble's Asia-based hardware manufacturing partners, had infringed three of its patents. A press release statement issued by the two companies was vague on the details but it implied that Barnes & Noble had paid royalties on some or all of those patents to Microsoft.

"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," the statement reads. "This paves the way for both companies to collaborate and reach a broader set of customers."

The legal dispute had seemed to swing wildly. Barnes & Noble had claimed that Microsoft had misused its patents to hurt its Android-based competition, a claim that got rebuffed. The administrative law judge even affirmed that Microsoft could legally use its patents to destroy its competition. However, the ITC attorney overseeing the case on behalf of the public interest had recommended that Barnes & Noble not be found in violation of the Microsoft's intellectual property.

Ironically, it appears that if Microsoft does take an equity stake in Barnes & Noble's Newco subsidiary as planned, it will be providing financial support for Linux-based devices, in addition to Windows 8-based ones.

Barnes & Noble had publicly floated the idea of creating a subsidiary for its consumer and college e-reader business since January 5, according to Lynch. At that time, Barnes & Noble indicated that it was involved in conversations with publishers, technology companies and retailers in expanding that business internationally. Currently, Barnes & Noble's college operations are only located in the U.S. market. According to the company's fiscal third-quarter earnings, which ended on Jan. 28, 2012, college division sales decreased 3% from $540 million to $525 million. Barnes & Noble attributed the decline to its shift toward renting textbooks, which drew fewer sales revenues than selling new or used textbooks. 

Barnes & Noble has 691 retail bookstores in the United States and 641 college bookstores. The college bookstores support "more than 4.6 million students and faculty members," according to Barnes & Noble's investor relations page.

An Associated Press story noted that a Barnes & Noble shareholder, G Asset Management, had proposed back in March to pay "$460 million for a 51 percent stake" in the college unit. Part of that proposed deal depended on Barnes & Noble separating the college segment from the rest of the company.