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Barnes & Noble and Microsoft Form ‘Newco’—A New Chapter for Ebooks
Posted On May 10, 2012
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On April 30, 2012, Microsoft (MS) and Barnes & Noble (BN) announced the end of their ongoing litigation and a joint partnership to further develop the NOOK and ebooks lines. The joint press release called this “a strategic partnership in a new BN subsidiary, which will build upon the history of strong innovation in digital reading technologies from both companies. The partnership will accelerate the transition to e-reading, which is revolutionizing the way people consume, create, share, and enjoy digital content.”

BN has struggled in recent years and the infusion of $300 million from Microsoft will only help shore up the NOOK platform and allow for further innovation (most probably based on some form of MS Windows operating system). For MS, after missing out on much of the internet and social media trends, this offers a chance to capture a segment of the ereader, apps, and tablet markets—something it has failed at, despite a strong historic interest in the areas dating from CD-ROMs in the 1980s.

The new entity, now called Newco, will include BN’s digital and college businesses—there is no date for this spin-off. MS will hold a 17.6% stake in the new company and plans to include a Nook application in its upcoming 2012 Windows 8 release. For MS, this investment is minimal given what it hopes to gain. The college etextbook and tablet markets are expected to grow quickly in the coming years. In the device marketplace, MS needs to re-assert the Windows brand, in an area dominated by Android and Apple’s iOS, to continue to gather marketshare as people switch to mobile versus desktop systems.

In making this deal, MS gets its foot in the door to ebooks, tablets, and etextbooks. BN gains stability and the chance to grow Nook into a true contender in the ereader and ebook marketplaces against giants Amazon and Apple. Until details of the new company and partnership are announced or become apparent, it is difficult to forecast the vitality or direction this may take the companies, the industry, or the products.

Both MS and BN seem extremely pleased with the new arrangements. However, things looked very different between the two companies just last year.

Strange Bedfellows

Although the BN and MS agreement provides mutual benefits—as well as an opportunity to up-end or at least provide a legitimate challenge to Amazon’s dominance—it also results from an ongoing legal battle that is underlying much of the device marketplace today.

Just a year ago, BN was counter-suing MS in an effort to stop MS’s collection of patent royalties for Android devices. “Microsoft is attempting to raise its rivals’ costs in order to drive out competition and to deter innovation in mobile devices,” BN charged. For its part, MS may indeed hope for a “cash cow” coming from Android. “In fiscal 2010, the Entertainment and Devices division, which includes the Xbox business and mobile software, made $8.1 billion in sales and $679 million in operating profit,” a McClatchy-Tribune article noted last year. The article went on to suggest that, if successful, Android could bring in about $1 billion annually to MS to fuel their future developments. Clearly, the stakes are high.

With a proliferation of devices—smart phones, tablets, and ereading plus systems—issues of licensing various aspects of the interfaces, look-and-feel, and operation of these systems have become major issues. In March 2011, MS sued BN, and others, in U.S. District Court over patent infringement of five specific patents used in BN’s NOOK ebook system.

BN counter-sued in April noting that the claimed infringements were nonexistent and that “MS is misusing these patents as part of a scheme to try to eliminate or marginalize the competition to its own Windows Phone 7 mobile device operating system posed by the open source Android operating system and other open source operating systems.” BN asserted that the lawsuit, in fact, consisted of “five insubstantial and trivial features,” including what MS has itself described as (1) the “display of a webpage’s content before the background image is received, allowing users to interact with the page faster,” (2) the “super impos[ing of] download status on top of the downloading content,” (3) “easy ways to navigate through information provided by their device apps via a separate control window with tabs,” (4)“[p]rovid[ing] users the ability to annotate text without changing the underlying document,” and (5) “[p]ermit[ing] users to easily select text in a document and adjust that selection.”

In its April 2012 press release, MS noted that the two companies had “settled their patent litigation, and moving forward, BN and Newco will have a royalty-bearing license under Microsoft’s patents for its Nook eReader and Tablet.” Thad McIlroy, blogging at The Future of Publishing, believes that BN “has agreed to pay MS for some or all of its previously disputed patents via this new company (currently called ‘Newco’). And that means MS managed to gain the upper hand in these negotiations.” Which would also imply that the infusion of capital into BN for the future development of Nook and ebook ventures was worth the legal resolution. Amazon is rumored to be working on a larger version of the Fire, along with enhancements to its 7-inch Kindles for a launch later this year. It will be interesting to see the role of MS and its Windows operating system in these first products off the Newco production line.

This doesn’t end the ongoing litigation concerning intellectual property in, especially, the Android arena. Android, a Linux-based operating system developed specifically for mobile devices like tablets and smartphones, is available on more than 300 million devices in use by February 2012. Although Google acquired Android Inc. on Aug. 17, 2005, making it a wholly owned subsidiary of Google, Linux-based systems remain popular, open development platforms.

Today, Android is the leading mobile handset software and in this highly charged competitive environment, lawsuits are bound to arise. Today, lawsuits are pending involving Google, MS, Apple, Oracle, and many others. The issue of “prior art” to substantiate claims of innovation (and thus patentable ideas or products) is a tricky one for the industry. As recently noted by Groklaw, discussions or imaginations of mobile or tablet-types of computing devices and their operation go back to at least the 1960s. How the courts sort all of this out will be interesting to follow—and only points to the ongoing need for patent and copyright reform.

In this case, although the exact terms are not available, at least there is resolution, an end to the acrimony, and a chance to focus on the future instead of bogging down the industry further in litigation.

What About Amazon and Its Critics?

Amazon continues to innovate, but seems to be facing more serious challenges to its dominance in online retailing, publishing, and other arenas. Well-known for its hard-dealing with producers and manufacturers over pricing, Amazon still sees Fire as the best hope to topple Apple’s dominance and establish Android as a serious contender for future computing. The final word hasn’t been written on that one; however, Amazon is clearly seeing some push-back from some of their brick-and-mortar partners. On May 2, Target announced that it would stop selling Kindle e-readers in their 1800 stores. Called “showrooming” in the industry, this practice allows potential users to go into stores to get hands-on experience with products—and then going online to get the best deal on that product. Amazon itself almost gleefully promoted this during last year’s holiday sales period by offering discounts if people bought products from Amazon after visiting brick-and-mortar stores. In a letter to Target vendors last January, the company reportedly warned that “what we aren't willing to do is let online-only retailers use our brick-and-mortar stores as a showroom for their products and undercut out prices.” Target began selling Kindles in 2010 and recently announced plans to expand its Apple product lines through 25 “mini-stores.”

This action alone won’t dramatically affect Kindle sales or Amazon’s overall profits, but represents a long-overdue wake-up call by stores already negatively impacted by e-retailing. This action follows earlier decisions by BN, Canada’s Indigo Books, and Books-A-Million to not stock titles published by Amazon in their stores.

Exactly What is an Ebook? An App?

Although librarians, authors, publishers, and other information professionals see the ebook as an entity, it is clear from many studies that, for many users, they are another form of app. Seen as information products (such as Wikipedia or most library-oriented online reference tools), everyone is using “ebooks” as defined as online/electronic versions of printed material or information. As these become further enhanced in the future with social media elements, video, stills, and other media, the distinctions between apps and ebooks will become less significant.

Although the numbers of people having ever read, cover-to-cover, the great literary tomes are few, Allison Flood, former news editor of The Bookseller, recently asked the question “can literary fiction survive the ebook age?” Citing Julian Gough’s estimate that “only 5% of literary fiction sales were electronic,” Flood notes that she believes the unique qualities that mark the genre will save it: “Literary fiction can be about anything, so long as it’s beautifully, intriguingly, surprisingly, gorgeously written, so long as it’s brilliantly constructed—from the word, to the sentence, the paragraph, the chapter, the novel, and beyond.” Clearly, however, the ebook marks a transition to new forms and formats for information and 21st century publishing.

Britain’s 2010 Publishers Association Statistics Yearbook was released this week, finding that of the 250 member publishers, there was a 366% increase in ebook sales over the previous year, making ebooks equal to 6% of books sales. Academic and professional titles led the way with 72% of “digital sales.”

As an example, J.K. Rowling's Potttermore estimates it sold more than 1 million British pounds worth of ebooks in the first 3 days of sales and has had more than a billion visits to its interactive website in just the first 3 weeks. Pottermore is also noteworthy for waiving digital rights management (DRM) for its ebooks. Something that may be catching on.

In April, science fiction publisher Tor Books announced it would be ending DRM from all their ebooks by July. “Our authors and readers have been asking for this for a long time,” said president and publisher Tom Doherty. “They’re a technically sophisticated bunch, and DRM is a constant annoyance to them. It prevents them from using legitimately-purchased ebooks in perfectly legal ways, like moving them from one kind of e-reader to another.” Could this signal we are nearing the end of all of the licensing headaches and format wars? Time will tell.

In terms of content trends, Amazon is now reportedly considering high-end clothing and accessories as another area for their sales program. Forbes’ Kelly Clay noted that “considering Amazon has nailed its approach to shipping and methods of disrupting nearly every other industry it integrates, it won’t surprise me if Amazon does the same to high-end fashion—and likely sooner than later.”

Amazon also recently announced a new 6.3.1 software upgrade for the Kindle Fire that adds new parental controls to its Android tablet. “The ability to password-protect purchases, disable access to specific content libraries, and block access to the Silk web browser. As with all software updates, these new features will be delivered automatically to your Kindle Fire.” These are efforts in response to customer interest in better control of kids’ use of the devices.

NOOKs, Kindles, and Tablets—Oh, My!

Given the lack of standards for information (text and media) display and manipulation, we continue to be left to consider trends in the various devices being used to access information today.

Good E Reader reports that the new BN Nook Simple Touch with Glowlight for reading in the dark (using e-ink technoology) is having problems with fulfilling even pre-orders and customers are experiencing a 2-week wait to receive their units. The unit was released earlier this month to good reviews.

Perhaps most interesting is the issue of reliable information on the market share for different types of e-reading devices. Due to the December holiday sales period, Amazon Fire reportedly shipping nearly 4 million units, taking 4% of the marketshare. IDC and Jumptap are both reporting that the surge in Kindle sales hasn’t continued into the new year.

“It seems some of the mainstream Android vendors are finally beginning to grasp a fact that Amazon, B&N, and Pandigital figured out early on: Namely, to compete in the media tablet market with Apple, they must offer their products at notably lower price points,” IDC’s Tom Mainelli notes. “We expect a new, larger-screened device from Amazon at a typically aggressive price point, and Google will enter the market with an inexpensive, co-branded ASUS tablet designed to compete directly on price with Amazon’s Kindle Fire. The search giant’s new tablet will run a pure version of Android, whereas the Fire runs Amazon’s own forked version of the OS that cuts Google out of the picture.” Does this represent normal, seasonal changes or something more? Time will tell.

Data from Jumptap show a continuing surge in tablet growth, particularly for Apple, in the first quarter of 2012. comScore data released in the past month, supports the growth of tablets finding that, as of February 2012, Amazon’s Kindle Fire now accounts for 54.4% of all Android tablets in the U.S., giving it a major lead over competitors. “Within the Android tablet market, Kindle Fire has almost doubled its share in the past two months from 29.4% share in December 2011 to 54.4% share in February 2012, already establishing itself as the leading Android tablet by a wide margin,” comScore noted.

Regardless of who you might prefer to believe, the market is clearly heating up. Apple, Amazon, and other major players are working hard to solidify the market and their positions. The MS/BN partnership only adds to the mixture and ensures a more interesting, and hopefully diverse, playing field.

The worldwide tablet market is entering a new phase in the second half of 2012 that will undoubtedly reshape the competitive landscape," forecasts IDC’s Bob O’Donnell. “While Apple will continue to sit comfortably on the top for now, the battle for the next several positions is going to be fierce. Throw in Ultrabooks, the launch of Windows 8, and a few surprise product launches, and you have all the makings of an incredible 2012 holiday shopping season.” 

Nancy K. Herther is a research consultant and writer who recently retired from a 30-year career in academic libraries.

Email Nancy K. Herther

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