Microsoft and Barnes & Noble have just revealed their plans  to form a B&N subsidiary. It will cost Microsoft $300 million for a 17.5% stake--at a valuation of the not-yet-named entity of $1.7 billion. This might seem surprsiing: Microsoft and... books? But the deal has to do with the Nook, and B&N's vast catalog of e-books.
Barnes & Noble was very public about its plans for some kind of spin-off enterprise centered on its Nook e-reader, tablet, and e-books catalog back in January . CEO William Lynch said: "We see substantial value in what we've built with our Nook business in only two years," adding "we believe it's the right time to investigate our options to unlock that value." What B&N was hoping to do was to realize some of the value of the Nook by separating it from its main B&N ties, and letting it float free--hopefully attracting deep-pocketed buyers right at the moment it seemed to be doing really well. Strike while the iron is hot, and so on. Speculation immediately after this news centered on who would be the type of firm most interested in Nook's charms.
Now we know. It's Microsoft. Purveyor of PC operating systems, business-centric software...and also a failed digital music player and associated ecosystem, and a burgeoning smartphone and (imminently) a tablet operating system. Ah, suddenly it all makes sense: Microsoft is partnering with Nook's new spin-off company to deliver e-reader powers directly into the heart of Windows 8 for tablets and smartphones. It's an attempt at building a more compelling suite of applications to tempt customers to buy MS-powered tablets instead of Amazon-powered ones, generic Android ones, or the iPad. It's also a way to pad out the Windows 8 ecosystem, and thus build a stronger rival to Amazon (which already offers music, movies, books, magazines, and more).
And let's not forget B&N's "industry leading" Nook Study platform, designed, as the company will tell you, to "provide students and educators the preeminent technology platform for the distribution and management of digital education materials in the market." Because education customers, buying hundreds of MS-powered machines for their school or district and filling MS's long-tail support and software order book, are another MS core customer (and they've been buying lots  of Apple gear recently , which'll have worried the execs in Redmond). There's even mention in the press release of extending Nook content to lots of MS customers "internationally," which is good for B&N because while Amazon's been gently expanding the Kindle around the world, the Nook has remained mainly American.
And then you remember that Microsoft is aggressively pursuing lots of top-rank firms to get them to pay a license for its patented tech that Android has (illegally?) included, and that B&N was refusing  to pay  MS for this privilege.
So this deal makes sense. One thing we do expect is that Nook's new home, whatever it gets called, won't remain a subsidiary of B&N for long. If it proves successful, it may end up becoming a core MS product--with B&N coming along for the ride. But proving successful is going to be far from easy, as we've noted recently: Both the e-book business  and the e-reader business  seem more than a little shaky.
[Image: Flickr user buyalex ]