There was huge news in the e-book world Thursday with reports that Microsoft (NASDAQ:MSFT) has plans to buy Barnes & Noble’s (NYSE:BKS) Nook tablet, e-reader and e-book business in a deal that would be worth $1 billion.
Ironically, I had just finished writing an analysis of the previous big news on the Nook front: B&N’s decision to ditch the customized Android OS its tablets have always used, in favor of Android 4.04 (Ice Cream Sandwich), complete with access to Google (NASDAQ:GOOG) Play, Chrome and Gmail.
This Microsoft news changes everything.
However, looking at the info points from my original analysis, it seems as though none of this was random.
- B&N rolled out an update to its Nook HD tablets, giving them full access to Google Play, along with the full suite of Google apps, including its Chrome browser. Whereas Nooks previously ran a customized version of Android that kept everything Google away from owners and locked them into Barnes & Noble for all things digital, the devices are now running a fully functional version of Android.
- In 2012, Microsoft invested $300 million in Barnes & Noble’s Nook Media division, a venture comprising of B&N’s Nook tablets, e-readers, digital bookstore and college bookstores.
- B&N’s Nooks are in trouble. E-reader sales in general declined last year, and Forbes says the company’s share of tablet sales for the holiday quarter in 2012 dropped from 4.6% the previous year to 1.9%, with unit sales declining from 1.4 million sold in the 2011 quarter to only 1 million in 2012.
The decision to open Nook HD tablets up to Android was great news for Google. Only two years ago, Nook tablets accounted for half of the tablets sold that weren’t Apple (NASDAQ:AAPL) iPads. Google — the company that owns Android — has been getting zero revenue from what were once the best-selling Android tablets. Amazon’s (NASDAQ:AMZN) Kindle Fire and Google’s own Nexus tablets have knocked the Nooks off their pedestal; still, this was a clear win for Google.
Was.
B&N — like most app store operators — takes a 30% cut of all sales. By supporting Google Play, it was effectively giving up that app revenue. It also was risking Nook owners downloading Amazon’s Kindle app from Google Play and buying their e-books from the competition. Thus, the decision to throw in the towel and go all-out with Android just didn’t make sense. Even if B&N ended up selling tons more Nook tablets as a result, starting at $199 (and frequently discounted to $149), there’s no way it was making any real money on Nooks. Selling more tablets would gain B&N nothing more than market share bragging rights.
Boosting Google also does nothing to help Microsoft, the partner that bought 17.5% of the Nook division. If Bing was being used for search, sure, Microsoft would gain some search ad revenue, but with Google Chrome now there by default, Google was going to be benefiting. Why do something so obviously contrary to the interests of one of your biggest investors?
It was a head-scratcher, all right — I couldn’t come up with any reason other than a desperation “Hail Mary” in hopes that boosting Nook market share might attract a buyer.
But now the pieces are falling into place.
Microsoft has been wanting to get into the e-book business for a long time (that’s one of the reasons it bought into Nook in the first place), and if it wants to take on Amazon, Apple and Google with e-books, it’s going to be a lot less messy to buy an existing company than to start from scratch.
For one thing, Microsoft won’t have to compete against B&N, so that’s one less worry. It also would gain all the publisher relationships and customer goodwill that B&N has already established. Nook apps for Android, iOS, Windows 8 and Windows RT should ensure Microsoft is able to compete on the e-book front without having to support another line of tablets (the Surface should be plenty to keep it busy) and there’s little point in staying in a declining e-reader market.
Bloomberg and others are reporting Microsoft intends to kill the Nook tablet line by 2014. In that light, the decision by B&N to unlock its tablets makes sense. Current generations of Nook tablets will never run Windows 8 or RT, and Microsoft certainly is not going to keep developing that custom Android OS for the devices. Rather than ticking off a whole ton of customers by rendering their hardware almost instantly obsolete, they’ll instead open them up to run Android so people get a few more years of enjoyment out of them.
Sure, Google will end up profiting from some of those customers, but the goodwill — or lack of ill will — was probably worth it. And at least some of those Nook tablet owners will continue buying Nook e-books from Microsoft … so it won’t be a complete loss.
And as a nearly 25% run-up in BKS shares would indicate, it’s pretty darn great for Barnes & Noble.
As for me … the deal cost me a couple extra hours, but this is a whole lot more exciting. And it finally makes some sense.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
