Tuesday, May 01, 2012

(BN) Microsoft to Invest $300 Million in Venture With Barnes & Noble

Bloomberg News, sent from my iPhone.

Barnes & Noble's Microsoft Deal to Drive Overseas Sales

April 30 (Bloomberg) -- Barnes & Noble Inc.'s partnership with Microsoft Corp. will accelerate its first expansion into international markets by providing access to millions of customers, Chief Executive Officer William Lynch said.

"We don't aspire to be anything less than being a leader in international markets when we launch," Lynch said today in a telephone interview. "We couldn't have done a better deal and had a better partner than Microsoft that allows us to compete internationally."

Microsoft is investing $300 million in a new subsidiary that combines Barnes & Noble's Nook e-reader and college bookstore businesses, the New York-based retailer said today in a statement. Microsoft will own about 18 percent of the unit, which has yet to be named, and Barnes & Noble will own the remainder. The investment values the unit at about $1.7 billion, more than Barnes & Noble's total market capitalization of about $800 million on April 27.

Barnes & Noble has been working to expand sales of the Nook and e-books outside the U.S., including distributing to retail partners. The venture with Microsoft will develop a Nook application for Windows 8, the newest version of Microsoft's operating system that will be released this year. That will allow Barnes & Noble to offer its digital content to consumers in Europe, Asia and Latin America, Lynch said.

It's a positive for Barnes & Noble because it gets "added distribution and access to international markets," said Peter Wahlstrom, an analyst for Morningstar Inc. in Chicago. "There are some pretty well-entrenched competitors overseas, so having somebody like Microsoft would actually help them."

Shares Surge

The largest U.S. bookstore chain's shares jumped 52 percent to $20.75 at the close in New York for the largest gain since the company's initial public offering in 1993. Redmond, Washington-based Microsoft rose 0.1 percent to $32.02.

Barnes & Noble, which generates all of its revenue inside the U.S., released the first Nook in 2009. The company has projected the unit would generate sales of devices, content and accessories of about $1.5 billion, or about 20 percent of the company's total, in the fiscal year ending today. The college unit operates 641 bookstores and generates about $1.8 billion in annual revenue.

Barnes & Noble will trail Amazon.com Inc. into overseas markets. Amazon, which has about 60 percent of the U.S. e-book market, sells its Kindle brand of devices at retailers in the U.K., Germany, France, Canada and Australia. The Seattle-based retailer also offers the device through its website in 175 countries and sells digital books in seven languages.

Overseas Competition

Amazon isn't the only competition. Rakuten Inc.'s Kobo brand agreed last year to sell its devices in bookstore chain WH Smith Plc in the U.K. Kobo also offers e-books in 60 languages, including Japanese, and sells its devices at brick-and-mortar retailers in 10 countries.

Barnes & Noble's other obstacle abroad may be selling the Nook where it lacks the 691-store retail presence that it has in the U.S. and which accounts for most sales of the devices. The company's largest stores have added what the company calls Nook boutiques that offer testing stations and customer service.

Barnes & Noble was working on a deal with Waterstones Booksellers Ltd. to add sales in the U.K. in January, a person familiar with the situation said at the time. Lynch said the company is receiving interest from several potential international retail partners and will begin selling Nook devices overseas this year.

Overseas E-Book Market

While e-book sales in Europe have trailed the U.S., the U.K. and the U.S. have had equal adoption rates, with digital versions accounting for about 6 percent of all book sales, according to O'Reilly Media. E-books account for less than 2 percent of the market in Germany and France, according to the Sebastopol, California-based researcher.

While Amazon had a two-year lead in selling e-books in the U.S., Barnes & Noble has gained about 30 percent of the market. In the quarter that ended Jan. 28, revenue from the Nook unit rose 38 percent to $542 million, while total sales rose 2 percent at the company's retail stores.

"It's the first inning in all those markets," Lynch said. Adoption of digital reading is more than two years behind the U.S. in most international markets, and that gives Barnes & Noble an opportunity to gain share, he said.

Since first offering the Nook, the company has introduced four more devices as well as digital content and accessories. The Nook Tablet, released in November and now starting at $199, is a touchscreen device that offers web browsing, applications such as the Angry Birds game and video watching in addition to digital reading.

Bigger Tablet Business

Barnes & Noble and Microsoft declined to comment on whether their partnership will include collaboration on creating new devices. They don't plan to sell Microsoft products in Barnes & Noble stores at this time, Lynch said on a call with analysts.

The partnership with Microsoft may give the Nook the kind of content and global expansion to make it a bigger force in the tablet business, said Michael Glickstein, chief investment officer with G Asset Management LLC, a Barnes & Noble investor who has pushed the company to spin off units. That kind of partnership makes the Nook business more valuable, Glickstein said.

"With the new Windows rollout, there are so many things you can do with the Nook beyond e-reading," Glickstein, who is based in New York, said today in a telephone interview. "Now that Bill Gates and Microsoft are in on the tech side, it's absolutely compelling."

To contact the reporters on this story: Matt Townsend in New York at mtownsend9@bloomberg.net; David Welch in Detroit at dwelch12@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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