Microsoft invests $300m in Barnes & Noble Nook

Microsoft has settled its patent dispute with Barnes & Noble and invested $300m in the bookseller's new digital content subsidiary, suggesting a Windows version of the Nook tablets and e-readers could mount a new assault on Amazon and Apple.

Microsoft has missed out on the e-reader and mobile tablet segments by confining Windows Phone to handsets, forcing OEMs to wait until Windows 8 for a touch-enabled slate OS. Meanwhile, B&N has created the Nook e-readers and tablet, running Android, to chase Amazon's success with Kindle, which was the biggest driver behind the retailer's first quarter results.

The success of Amazon's controversial decision to move into devices, and create its own content user experience, has never been lost on B&N, whose bricks and mortar bookshops have been pressurized by its rival's online business model. Now it will create a new unit to house its digital and college business units, giving full rein to the new media offerings, though there will still be close association with the stores.

Of course, it will also have the benefit of Microsoft's deep pockets. B&N will own about 82.4% of 'Newco', while Microsoft will have the rest, which values the Nook-based unit higher than the whole of the rest of the company.

Microsoft says it will integrate the Nook digital bookstore into its forthcoming Windows 8 operating system, making a W8 Nook model, with an optimized reading experience, a near certainty. That could also mean a move away from Android - like Amazon, B&N already heavily customizes the user interface of the Google OS so its sales have not been reliant on association with the search giant's brand or services.

The deal comes with the added advantage of ending the patent lawsuit, filed by Microsoft in 2011 as part of its bid to weaken Android, either by charging hefty royalties for its Linux-related patents, or by suing those who refused, like Motorola Mobility. B&N Newco will now have a royalty bearing licence for Microsoft's patents.

B&N said in its statement that it would explore "multiple options" for spinning off the new unit, with "no assurance that the review process will result in a strategic separation or the creation of a standalone public company". In January, it had told shareholders that it was exploring these options, after Nook unit sales had risen by 70% year-on-year in the 2011 holiday season. Digital content sales were up by 113% in the same period and B&N expects those sales to reach about $450m this fiscal year.

The deal has been spearheaded by Andy Lees, who was previously head of the Windows Phone business, but was moved into 'special projects' at the end of last year. One of those may well be a Windows 8 e-reader, given that Microsoft executives have recently hinted at such a gadget, with the new Metro user interface.

According to various reports, Amazon has over 60% of the ebook market, followed by B&N on 25% and Apple on 15%. As well as being US-only, B&N has always had the disadvantage of significantly smaller R&D and marketing resources than its two rivals, but that may be about to change. At least the Microsoft deal will help the smaller firm reverse the cash bloodletting which has accompanied its major digital content push (it now has 300 employees in that business). And at the announcement it talked, for the first time, about taking the Nook devices and digital bookstore international, further breaking the ties with its physical store brand.