Microsoft and Barnes & Noble team up to take on Amazon

1st May 2012

Barnes & Noble was once pre-dominant in US bookselling.  And it was – briefly – an early mover in online book sales before its almost total eclipse by Amazon.

Now the two have joined up to set up a new company to push Barnes & Noble's Nook e-reader.  The question for investors is whether two fallen stars can create a new shining constellation – effectively now second movers to Amazon and its Kindle e-reader and to Apple and its i-tunes online content marketing.

And it is a tie-up  that will be looked at beyond the technology and bookselling areas. As chief executives increasingly tumble to pay package pressures from investors, they know that stockholders will want more control if they slip. Investors have smelt blood – and they want to punish poor performance or stick-in-the-mud strategies. The question they must pose is can a company re-invest itself?

Shareholders pressure directors

Shareholders want to know answers to that at insurer Aviva, pharmaceuticals group AstraZeneca, advertisement agency WPP, and now at Man Group whose annual general meeting today was hardly a stroll in the park for the hedge fund's directors.

Man Group is the world's biggest hedge fund management group. But its own share price is hardly one to inspire investors – down 60 per cent over the past 12 months. Shareholders are baying for the head of chief executive Peter Clarke – or at least putting him on notice that he has just a limited time to turn the group performance around. One serious problem he has to face is the underperformance of its core fund, the computer-driven AHL, which accounts for over a third of funds under management. Can it change the algorithms in time to save Clarke?

The Barnes & Noble/Microsoft link-up involves a $605m investment from Microsoft – small change by its standards, around 1 per cent of its cash reserves. The idea is to put the bookseller's  Nook e-reader business back on the map to  better compete against the top-selling Kindle e-reader and iPad tablet computer.  If it works, it would put Amazon and Apple respectively under pressure. And it gives Microsoft a greater visibility in the e-reader and tablet markets ahead of the launch of its Windows 8 operating software later this year. Windows 8 will feature a Nook e-reader app, the companies said. 

It also gives Microsoft a link to content which it could use in taking on Apple.

The tie-up sent Barnes & Noble shares soaring to around $27 before settling back to $20.75, up 52%. Microsoft's stock was little changed.

Digital content is king

The deal underscores the importance of the digital book business as consumers increasingly turn to electronic sources to buy and read books.  And it solves the bookseller's money raising issues.

The link-up could be the start of Bricks'n'clicks 2.0 – the joining of software with stores.

And it will force investors to look more closely at how – or whether – once pre-dominant companies can revive their fortunes.

Microsoft and Barnes & Noble have lost their first mover advantages to previous second-movers – Apple and Amazon. So can they regain the lead from behind?

What are second mover advantages?

And the disadvantages?


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The Financialist

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