Microsoft Mulling Nook Media LLC Purchase For $1 Billion

Posted: May 9, 2013 in Microsoft, Technology

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Microsoft is offering to pay $1 billion to buy the digital
assets of Nook Media LLC, the digital book and
college book joint venture with Barnes & Noble and
other investors, according to internal documents
we’ve obtained. In this plan, Microsoft would redeem
preferred units in Nook Media, which also includes a college book division, leaving it with the digital
operation — e-books, as well as Nook e-readers and
tablets. The documents also reveal that Nook Media plans to
discontinue its Android-based tablet business by the
end of its 2014 fiscal year as it transitions to a model
where Nook content is distributed through apps on
“third-party partner” devices. Speculation about the
plan to discontinue the Nook surfaced in February. The documents we have are not clear on whether the
third-party tablets would be Microsoft’s own Windows
8 devices, tablets made by others (including
competing platforms) or both. Third-party tablets,
according to the document, are due to get introduced
in 2014. Nook e-readers, meanwhile, do not appear to fall into
the discontinuation pile immediately. Rather, they’re
projected to have their own gradual, natural decline —
following the general trend of consumers moving to
tablets as all-purpose devices. Microsoft and B&N representatives declined to
comment for this story. A deal to buy the digital assets of Nook Media is the
natural next step for Microsoft, which first announced
a plan to work with Barnes & Noble on its Nook
devices and content in April 2012, ponying up $300
million at the time to help. That plan included an
additional $180 million advance to develop content for its Windows 8 devices — which Nook has been
doing. To date, there have been 10 million Nook devices
sold, including both tablets and e-readers, with more
than 7 million active subscribers. Microsoft has seen
limited interested in its Windows 8 devices (although
it says it has sold more than 100 million licenses for
the OS to date). Currently the Nook app is available on every major platform, including Android, iOS and
Windows. Nook Media split from the retail arm last October with
a $300 million investment by Microsoft for a 16.8
percent stake in the company. The partnership was
aimed at getting B&N content on then-nascent
Windows 8 tablets. At the time, President of Digital
Product at Nook Media, Jamie Iannone, said “It’s hardware, software, content: everything Nook is part
of Nook Media. There will always be a long-term
relationship between Barnes & Noble and the Nook
business.” Nook’s decline seems to have helped alter company
strategy. Barnes & Noble founder Leonard
Riggio proposed buying back the whole of the
company’s retail operation. The documents TC has seen values B&N at $1.66
billion. When Nook Media was first formed, the
valuation of that division alone was $1.7 billion. When
Pearson invested $85 million at a 5 percent stake in
January, it was valued at $1.8 billion. If the deal goes
through, Microsoft’s $1 billion purchase will be well below the price it had originally bought in at. Projections in the document, which are based on
company filings and management discussions, show
the Nook unit bringing in total revenue of $1.215
billion for fiscal year 2012 (which for Barnes & Noble
ended April 30th), for a loss of $262 million in
earnings before interest, taxes, depreciation and amortization (EBITDA). It expects revenue to fall to
$1.091 billion in fiscal year 2013, for a loss of $360
million as tablets are phased out — and estimates
revenues to gradually recover, up to $1.976 billion by
fiscal year 2017, for EBITDA profit of $362 million. In the meantime, the Nook division has taken a
beating this year following a slow holiday season. The
new models have sold at a discount for weeks at a
time and their flagship 10-inch Nook HD+ fell from
$269 to $179. Kindle is offering the Fire HD for the
same price. The hardware, while in many ways superior to Amazon’s, seems to have fallen behind in
the race to market share and revenue. If Microsoft
steps in, the dedicated e-reader race between the
stalwart B&N and Jeff Bezos’ Amazon could be over.

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