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Microsoft announced yesterday that it will invest $605 million into Barnes & Noble’s Nook e-reader business, a move that gives it a 17.6 percent stake in the new subsidiary.

The Wall Street Journal writes that “the deal catapults Microsoft into a high stakes battleground whose combatants include Amazon.com Inc., Apple Inc. and Google Inc., and also gives Barnes & Noble a lifeline to continue investing in its fast growing digital-book business ... The tie-up with Barnes & Noble also furthers Microsoft's strategy to move beyond its Windows and Office software franchises and invest its growing cash pile in businesses—some $60 billion at the end of March—that it failed to capitalize on in recent years.”

According to the Journal story, “By taking a minority stake in a new subsidiary that will market the Nook, Microsoft gains several footholds in e-reading. For starters, Barnes & Noble committed to creating a Nook e-reading app for Windows 8 - a forthcoming Microsoft operating system that will be used in tablet-style hardware and PCs - and for smartphones powered by Microsoft software. The Nook, like Amazon's Kindle Fire, runs on Google's Android software ... Another possible benefit for Microsoft is that its software may power devices designed for electronic books, magazines and newspapers. Executives of the two companies didn't rule out the idea that future Nook devices could run Microsoft operating systems, and their contract also cites the possibility Microsoft could make e-readers.

“The deal comes as technology continues to transform the book retailing landscape and the habits of readers, with devices like Amazon's Kindle and Apple's iPad offering book buying as well as reading.”

The Nook currently has a 27 percent market share in the e-book market, compared to 60 percent for Amazon’s Kindle.
KC's View:
When this news broke yesterday, a friend of mine sent me an email that said...

Our world has changed so much that the two hated monopolists of the 1990s - Microsoft and B&N - must cling together to even stay relevant.

I’m not sure that this is entirely fair, but the broader point he is making is a good one - that sometimes, in order to maintain relevance, companies do need to forge new alliances and find new opportunities. I think that it is likely we will see new, Microsoft-driven functionality in the Nook at some point, which will broaden and sharpen the competition.