Microsoft invests $300M into new Barnes & Noble e-book business

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Microsoft (NASDAQ:MSFT) will invest $300 million into a new Barnes & Noble subsidiary dedicated to advancing the bookseller's digital content strategy.

The unit, tentatively named Newco, will merge Barnes & Noble's digital and college businesses. Barnes & Noble will own approximately 82.4 percent of Newco, which will operate in association with the company's retail stores. Microsoft will own the remaining 17.6 percent. Microsoft also will integrate B&N's Nook digital bookstore into its forthcoming Windows 8 operating system.

The deal additionally signals the end of the companies' ongoing patent battle: In 2011, Microsoft filed suit against Barnes & Noble, alleging the Android software powering the Nook platform infringes on Microsoft's intellectual property rights. Moving forward, Barnes & Noble and Newco products and services will retain a royalty-bearing license under Microsoft's patents.

Barnes & Noble said it will explore multiple options for spinning off the Newco unit, with no assurance that the review process will result in a strategic separation or the creation of a standalone public company. In January, Barnes & Noble said it is exploring options to spin off the Nook e-reader business after Nook unit sales increased 70 percent year-over-year during the nine-week holiday period ending Dec. 31. Digital content sales--including e-books, digital magazines and applications--grew 113 percent during the same period.

Barnes & Noble forecasts fiscal 2012 digital content sales will reach approximately $450 million. Based upon anticipated device sales, the company expects annualized U.S. digital content sales will achieve a run-rate of approximately $700 million to $750 million by the end of the current fiscal year.

Barnes & Noble introduced the Android-based Nook Tablet in early November, touting a wealth of e-books, mobile applications and HD video content in its bid to rival Amazon's Kindle Fire as well as Apple's (NASDAQ:AAPL) market-leading iPad. Priced at $249, which is $50 more than the Kindle Fire, the Nook Tablet boasts twice the RAM of its competitor and double the storage, offering consumers access to millions of books as well as more than 250 periodicals, many with interactive features.

The Nook Tablet has so far failed to mount a significant threat to the Kindle Fire, however. Less than six months since its retail release, the Kindle Fire already controls more than half of the U.S. Android tablet market, according to data issued last week by market research firm comScore; the Nook Tablet did not even register among the top ten Android tablets according to market share.

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