Barnes & Noble, which analysts believe needs deeper financial pockets and a global presence to compete in the digital reading space with Amazon and Apple, solved both of those issues Monday morning, creating a new subsidiary in partnership with Microsoft. The new unit, temporarily named Newco, will house B&N’s digital assets, as well as its college stores, and will be backed by a $300 million investment from Microsoft that will give the tech company a 17.8% stake in Newco.
At least initially Newco will be focused on supporting reading applications for Windows 8 including the development of Nook app for the Windows 8 platform, although both B&N CEO William Lynch and Microsoft president Andy Lees emphasized they see a broad range of possibilities of development new products that will broaden the way content in created, consumed and published. Both men also repeatedly emphasized the global aspect of link with Microsoft with Lynch noting in a conference call that all of the global customers drawn in by Microsoft will be new since, to date B&N’s digital business has had no global presence.
Lees said Microsoft is interested in both developing new ways people read in both the consumer and education areas. He said Microsoft will be more than just a “platform provider” and intends to work with B&N to find ways to add value to content. Lees said Newco will help blur the lines between different types of content.
Newco will include asset from both B&N and Microsoft and the patent dispute between the two companies has been resolved. Both men assured analysts that they have a number of ventures in mind but said they were not prepared to discuss the “roadmap” for the future. Lynch also emphasized that Newco’s relationship with B&N’s retail stores will remain firm. B&N has no intention of undermining the “symbiotic relationship” between its digital operations and the stores, Lynch said as the company explores just what Newco’s relationship with B&N will be.
The Microsoft investment puts a $1.7 billion value on Newco, a valuation Lees said was arrived at by considering the assets that are in the company plus the long-range opportunity. As identified in the "commercial agreement" the assets B&N is contributing to Newco are the Nook devices, online bookstore, e-content publishing as well as the college businesses, which includes its college bookstores.
In addition to its $300 million investment, Microsoft will make $60 million in advance payments to Newco for the first three years of the contract as part of a revenue share agreement. Lynch said B&N will manage the publisher relationship with the NewCo store; the agreement calls for B&N to use its relationships with publishers "to assist NewCo in entering into agreements with such publishers to procure Reading Content for the NewCo Store."