Microsoft eyes tablet lift via Barnes & Noble deal
NEW YORK/SEATTLE |
(Reuters) - Microsoft Corp is jumping into the fast-growing e-books market by investing $300 million in Barnes & Noble Inc's Nook e-reader and college business, as it looks to unlock Amazon.com and Apple Inc's grip on the exploding tablet computer market.
The move comes just six months before the world's largest software maker is due to launch its new touch-enabled Windows 8 operating system, and the inclusion of a Nook app on Windows tablets should allow them to compete with Apple's iPad and Amazon's Kindle Fire.
It also gives Microsoft a direct interest in electronic publishing just as the market for downloadable college textbooks starts to take off and the publishing industry undergoes a radical shift toward electronic distribution.
"It's a good strategic deal," said Sid Parakh, an analyst at fund firm McAdams Wright Ragen. "It gets Microsoft in the game for e-readers, and gives them access to a market that has been growing nicely and they've basically sat out of. It also makes Windows 8 a more compelling platform from an e-readers perspective."
Shares of Barnes & Noble soared 60 percent, while Microsoft shares, which recently hit a four-year high, were flat. Microsoft's initial investment values the new unit at $1.7 billion. Over the next five years, Microsoft has committed to invest another $305 million.
The deal - initially worth only 0.5 percent of Microsoft's cash hoard - is financially small, but strategically important for both companies.
"The deal brings Microsoft technology and engineers into the Nook business - that talent will be tapped to make the Nook even better," said Albert Greco, a book industry expert at the business school of Fordham University in New York. "It gives Microsoft a tablet already, and Barnes & Noble global reach for the Nook platform, through Windows 8."
Barnes & Noble Chief Executive William Lynch told Reuters that the investment would go primarily to fund the international rollout of the Nook's digital bookstores and new reading software for the Windows platform.
MICROSOFT BACKS ANDROID
Under the deal announced early on Monday, Microsoft will take a 17.6 percent stake in a new Barnes & Noble unit combining the bookseller's college bookstore and Nook businesses. Those areas make up about 40 percent of Barnes & Noble's total business.
Microsoft, which will get a share of the new unit's sales, will pay $25 million a year for the first five years to help with development costs and acquiring content, and will make an upfront payment of $60 million a year for the first three years after the launch of Windows 8, essentially guaranteeing minimum sales of that amount to Barnes & Noble. That means Microsoft's total outlay will be at least $605 million.
As part of the deal, Microsoft has dropped a patent lawsuit against Barnes & Noble over the Nook, which runs on Google's Android system, and will get royalties on those patents. There is a possibility that future Nook models will be based on the Windows operating system, but executives would not comment on that in a call with analysts.
Barnes & Noble gets a much-needed capital injection and a way to enter the digital books market outside the United States. The new unit will be run by Barnes & Noble and will maintain a relationship with the U.S. bookstore chain's nearly 700 stores.
Barnes & Noble's Nook has found a strong following, allowing it to garner some 27 percent of the U.S. e-books market in the 2-1/2 years since the device was launched, compared with Amazon's 60 percent and Apple's 10 percent. But battling Amazon's market-leading Kindle has proved expensive.
"It gives them a much larger partner with deeper pockets, it gives them increased reach," said Morningstar analyst Peter Wahlstrom. "In the last two years they've had their backs against the wall."
Last year, Barnes & Noble suspended its dividend to direct more cash into developing Nook, which resulted in a well-reviewed glow in the dark Nook introduced last month.
In January, however, it lowered its sales and profit forecasts as it faces pressure from Amazon's aggressive pricing strategy which has prompted it repeatedly to lower the prices on its own devices.
NOOK TO GO GLOBAL
Barnes & Noble has poured tens of millions of dollars into developing the Nook. The first version hit the market in 2009, two years after the Kindle.
The company's e-readers, tablets and electronic book sales have helped it offset a broader decline in book sales. Same-store sales of books at its brick-and-mortar stores have edged up again largely thanks to the bankruptcy last year of Borders Group.
But the Nook has been available only in the United States and the company said last year it wanted to take its digital business to new markets.
Barnes & Noble said in January that it might spin off its digital business, which includes the Nook, arguing that investors were not giving the company enough credit for that growth.
The company did not say on Monday if it would take the new venture public.
Barnes & Noble put itself up for sale in 2010 but attracted only one firm offer - a bid for $17 per share, or $1 billion, last May, from Liberty Media, which was drawn by the Nook's growth.
Liberty ultimately decided to invest $204 million rather than buy the company outright. It now has preferred shares it can convert into a 16.6 percent stake in Barnes & Noble at a strike price of $17.
Barnes & Noble shares were up 60 percent at $21.94 on the New York Stock Exchange on Monday afternoon. Microsoft shares were up 0.1 percent at $32.00 on the Nasdaq.
Data points to weaker economic momentum
WASHINGTON |
(Reuters) - The U.S. economy appeared to downshift as it entered the second quarter, with consumers increasing their spending only modestly last month and a gauge of business activity in the Midwest falling sharply in April.
Consumer spending rose 0.1 percent in March from a month earlier when taking inflation into account, the Commerce Department said on Monday.
Separately, a report from the private Institute for Supply Management-Chicago showed business cooled much more than expected in the Midwest during April.
"The economy is losing a little momentum," said Gary Thayer, a macro strategist at Wells Fargo Advisors in St. Louis.
The U.S. recovery had already slowed substantially in the first quarter as businesses cut back on investment and restocked shelves at a slower pace, data on Friday showed. Gross domestic product expanded at a 2.2 percent annual rate in the first three months of the year compared to 3 percent in the fourth quarter.
Stronger consumer spending cushioned the blow in the first quarter, but Monday's data suggested consumers ended the period spending less freely.
Consumer spending climbed 0.3 percent in March, just below the median forecast in a Reuters poll, but inflation ate up most of that gain. "The higher gas prices we saw last month are taking their toll," said Todd Schoenberger, managing principal at the Black Bay Group in New York.
After-tax income climbed 0.2 percent when accounting for higher prices, the Commerce Department said.
The data pushed U.S. stocks lower and lifted prices for the country's government debt. Investor sentiment also was hurt by confirmation that Spain sank into recession in the first quarter.
MIDWEST DOWNSHIFTS
The ISM-Chicago index for the Midwest, which is based on a survey of both factories and service businesses, fell to 56.2 in April, its lowest level since November 2009.
It was the second consecutive monthly decline, although the gauge stayed above the 50 level that separates growth from contraction.
The reading follows several regional manufacturing surveys that have also suggested the economy started the second quarter on a soft note.
Another survey released on Monday showed that U.S. small business hiring slowed considerably in April, adding to signs of weakening in labor market conditions. Businesses added 40,000 new jobs, a step back from the 75,000 positions created in March, according to Intuit, a payrolls processing firm.
The government's closely monitored employment report due on Friday is expected to show that payrolls increased 170,000 in April, according to a Reuters survey.
The U.S. economy is still limping back from the 2007-2009 recession, with an unemployment rate still over 8 percent and households stretched thin by a sour housing market.
The fraction of Americans owning homes fell to a 15-year low at 65.4 percent in the first quarter, the Commerce Department said in another report. That suggests an ongoing fall in home prices is discouraging people from buying.
Despite the cool down in economic growth, many economists doubt the U.S. Federal Reserve will engage in another big round of monetary stimulus.
The Commerce Department's income and spending report on Monday showed inflation is running above the Fed's target. A price index for personal spending rose 2.1 percent in the 12 months through March, just above the central bank's 2 percent goal.
Indeed, a measure of so-called core prices, which strips out food and energy costs, suggested inflationary pressure may be building up. The core index, which is often read as a measure of inflation trends, rose 2.0 percent in March from a year earlier, the biggest year-on-year rise since November 2008.
(Additional reporting by Ryan Vlastelica and Ellen Freilich in New York and Ann Saphir in Chicago; Editing by Andrea Ricci)
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