By Rex Crum SAN FRANCISCO -(Dow Jones)- For Microsoft Corp. the question is why, as in why the software giant would want to get into the digital-book business with Barnes & Noble Inc. Microsoft (MSFT) said Monday it would invest $300 million to acquire almost 18% of a new Barnes & Noble (BKS) subsidiary that combines the Nook e-reader as well as the company's digital- and college-book business. On a morning conference call, the companies said that the partnership would, at least temporarily, be called Newco. Microsoft President Andrew Lees said the deal was "grounded in developing future innovations to accelerate e-reading across a broad range of Windows devices." In the works is a Nook app for the upcoming release of the Windows 8 operating system. But there is more to the deal for Microsoft than the seemingly altruistic effort to promote the market for e-reading, according to James McQuivey, an analyst with Forrester Research. "Microsoft doesn't really care about being in the book business. They want to be in the digital-customer business," he said. "They have to look at how they are going to stay relevant, because so far Microsoft tablets have had little to offer. The bookstore is a stepping stone toward relevancy for them." The market for e-book readers is one of the hottest in consumer technology. Amazon.com Inc.'s (AMZN) Kindle is accepted as the market leader, with the Nook in second place at about 25% of the market. Technology-research firm Gartner Inc. currently estimates that worldwide sales of e-readers reached 14.7 million units in 2011, and should climb to 18.3 million devices this year and 20.4 million in 2013. Now that e-readers increasingly are including the functionality found in tablets by offering interactive apps, the lines between the devices are blurring. Gartner estimates that total tablet sales of 60 million units in 2011 will nearly double to 119 million this year and hit 182 million next year. As far as tablets are concerned, Gartner said Apple Inc.'s (AAPL) iPad remains the global leader, with 73 million units forecast to be sold this year. Second place is held by Google Inc.'s (GOOG) Android OS, with almost 38 million sales forecast. Barnes & Noble's Nook devices run on Android. "Our view is that Microsoft will want to make sure that there are alternatives to Amazon for digital content and make sure there is a counterbalance to Apple's growing partnerships for content and creation of interactive educational content," wrote Rick Sherlund, of Nomura Securities, in a research note. Sherlund rates Microsoft's stock a buy with a $37 price target. Analysts say that one of the opportunities for Microsoft lies in the potential to provide the operating system for the Nook. Neither company said the Nook would be based on Windows, but Barnes & Noble Chief Executive William Lynch said the deal would have "many dimensions," including "overarching goals to jointly create compelling experiences across a range of Windows devices." Citigroup analyst Walter Pritchard said that he believes the deal foreshadows Windows becoming the operating system for the Nook sometime over the next 12 to 18 months. Underlying his argument is that the Nook is powered by an chip set designed by ARM Holdings PLC (ARMHY) and built by Texas Instruments Inc. (TXN), and Microsoft already has said that TI will be one of Microsoft's initial ARM chip-set partners when Windows 8 rolls out later this year. "As the various flavors of Windows are unified in the Windows 8 generation, having this broad array of devices becomes more important as it enables content owners and application developers to reach the largest possible number of end users," Pritchard wrote in a note. He holds a buy rating and $35 target on Microsoft's stock. Whatever the reasoning behind the deal, the news sent Barnes & Noble shares shooting up 62% in early afternoon trading to $22.19. Microsoft was basically flat at $32. -Rex Crum; 415-439-6400; AskNewswires@dowjones.com
