Opinion

Felix Salmon

Microsoft enters the e-book wars

By Felix Salmon
April 30, 2012

You think markets are efficient? Check this out: Barnes & Noble stock opened 2012 at $14.75 per share and falling fast; by January 5, the opening price was just $9.50. At that price, the entire company was worth just $550 million, and there was a very real fear that the entire company could go to zero, following in the footsteps of Blockbuster and other real-world retailers selling content more easily bought online.

Today, of course, all that has changed. Barnes & Noble has sold a 17.6% stake in its digital and college businesses to Microsoft, for $300 million — a deal which values B&N’s remaining 82.4% stake at $1.4 billion. And while the $300 million is staying in the new joint venture and therefore not available to help the bookstore chain with cashflow issues, the news does mean that Barnes & Noble won’t need to constantly find enormous amounts of money to keep up in the arms race with Amazon. That’s largely Microsoft’s job, now.

This deal is a bit like one of those high-profile investments by Warren Buffett in a distressed company: a vote of confidence by someone powerful enough to be able to fund the struggling firm through its troubles. Except in this case, the Microsoft investment is much bigger than that, since it comes with deep integration into the Windows 8 operating system. Barnes & Noble no longer needs to sell Nooks, or persuade people to download the Nook app on their iPad: everybody with a Windows 8 device will have the Nook reader built-in.

The e-book market is still young; if Amazon continues to be seen as the enemy, there’s no reason in theory why the Nook shouldn’t become just as popular, if not more so. It’s true that you can’t read Kindle books on your Nook, or vice versa, but over the long term, we’re not going to be buying Kindles or Nooks to read books. Just as people stopped buying cameras because they’re now just part of their phones, eventually people will just read books on their mobile device, whether it’s running Windows or iOS or something else. And that puts Amazon at a disadvantage: the Windows/Nook and iOS/iBook teams will naturally have much tighter integration between bookstore and operating system than anything Amazon can offer.

All of which has lit a real fire under the Barnes & Noble stock price, which opened at $25.79 this morning and looks as though it’s going to close somewhere between $20 and $25 per share. That’s an increase of much more than $300 million in market capitalization, and there’s upside, too: the valuation of the parent is now equal to the value of its stake in the subsidiary. So if the subsidiary rises in value, or if the rest of the company is worth anything at all, then the shares can rise further from here.

The one thing you can certainly expect, though, is volatility. Because Barnes & Noble is no ordinary stock. There are 60.2 million shares outstanding, but of that total the free float — the shares freely traded on various stock exchanges — is just 26.82 million. Meanwhile, at last count, the short interest in Barnes & Noble — the number of shares which had been borrowed by people selling them in the expectation that they would fall — was a whopping 19 million shares.

This, ladies and gentlemen, is what is commonly known as a short squeeze. All those shorts have lost a fortune today, and they’re going to have to cover sooner rather than later, driving the price up artificially. So at least for the next few days, it’s probably worth taking any market valuation for Barnes & Noble with a bit of a pinch of salt: technical factors are likely to overwhelm fundamentals until the shorts have retreated, licking their wounds.

After that, however, we finally have a real three-way fight on our hands in the e-book space, between three giants of tech: Apple, Amazon, and Microsoft. And that can only be good for consumers.

Comments
9 comments so far | RSS Comments RSS

The reason why I went with the Nook two years ago was that it offered an open document standard (ePub), versus the Kindle’s proprietary and closed one. Sites like gutenberg.org simply couldn’t offer Kindle versions. More recently Amazon has moved to open up the Kindle format (they are starting to become available on gutenberg), but it really hurt them initially. I think many consumers bought into the Kindle early on without realizing the disadvantages of the proprietary document format.

Posted by Curmudgeon | Report as abusive
 

@Curmudgeon, I’m sure you know but you can load MOBI format onto Kindle, and not very difficult to convert ePub to MOBI (although perhaps its a technical complication to far for most Kindle users).

Don’t really agree with the implicit assumption that all e-reading devices are the same. I bought Kindle because it offers excellent reading quality and really long battery life – and although i have an iPad would never chose to read a book on it. Still, its a testable hypothesis for Amazon that more book-buying customers prefer to read on an integrated tablet rather than a book-specific device, and perhaps the Kindle Fire was Amazon’s acknowledging that a pure Kindle would limit its potential market.

Posted by J_F | Report as abusive
 

J_F, I wasn’t making the implicit assumption you describe. The Nook also offers excellent reading quality and long battery life (days) – it is not in any way comparable to an iPad, and is highly comparable to the lower-end Kindles.

I use the Nook for two reasons. First, it’s my library. Like the Kindle, there is also a reader for my notebook and Android phone. Second, it offers me a broad selection of reading during my travels.

Converting ePub to MOBI isn’t something that people simply wanting to read is going to appeal to.

Posted by Curmudgeon | Report as abusive
 

I also disagree with that: “…we’re not going to be buying Kindles or Nooks to read books. Just as people stopped buying cameras because they’re now just part of their phones, eventually people will just read books on their mobile device..”

The reason I read on a Kindle is that it has a non light emitting screen contrary to say an iPad. As long as I can find an e-reader with a non light emitting screen, that will be my first choice.

Posted by EmilianoZ | Report as abusive
 

What Emiliano said. Until someone invents a multi-function device that has the beneficial properties of e-ink without the drawbacks, there’s going to be a market for dedicated e-readers. An app on a tablet or smartphone is fine as a temporary means to access your library, or for reading in the dark, but it’s not a long term replacement for an e-ink device.

Also, I question how tight MS and B&N can make the integration. After all, integrating the web browser and the OS got Microsoft in a lot of trouble. I’d be amazed if there weren’t anti-trust implications for bundling the Nook store with Windows.

Posted by GingerYellow | Report as abusive
 

e-pub is the best format for e-books in my experience. Nook has very limited Latin only fonts BUT e-pub allows embedding fonts into the e-book file – I am using Calibry and the integration is” add book to Calibri library, transfer to your device…The font embedding is done through a script in Calibry seamlessly for the user. Hence, you can read books in Mandarin, Cyrillic, Vietnamese,etc… E-pub allows fluid text, adjusted text structure to the size of the screen, beautiful fonts, pictures, etc…Kindle format is inherently not capable of this, it is just not designed to be capable.

So, for the quality of reading that I prefer, Kindle was not an option. Nook and Sony readers were the other good hardware providers left. Sony readers were more expensive and had problems with handling mixture of DRM and non-DRM titles stored together – the reader was simply freezing.

Nook supports eBook – perfect for me, albeit not supporting txt or doc formad. It does support pdf though.

So, Microsoft got the best – they can simply integrate a book library software within Windows along with all multilingual fonts already in place within the OS and capture the entire international market. There is NOBODY even close to this opportunity. Even if Apple decides to create stand alone e-ink reader, iOS is not that native.
Microsoft doesn’t even need a single marketplace to handle the books. Of course they will add books to their own marketplace, but ALL the software is already there, and much better than any competitor.

Posted by Ananke | Report as abusive
 

I dont think that the book reader is an efficient weapon against tablets. Only someone who makes a tablet that can compete with the iPad will ever be a threat. Why? Because the book reader business is messy, english-centric and not easily exportable to the whole world. To be able to sell books, you have to go through a minefield in every single country with copyrights, even if the language is the same. That is why the amazon model has been so slow to penetrate most countries other than english speaking ones and even those have not been easy. Thus, the ebook is a very limited weapon in these wars.

Posted by moctavio | Report as abusive
 

@Curmudegeon – sorry, the second paragraph was in response to Felix’s post not yours.

Posted by J_F | Report as abusive
 

One of the knives on which this discussion turns is where the consumers are. With digital cameras, you don’t buy film. With ebook readers, you do purchase content, though. So a person can certainly read an ebook on an ipad or smartphone or laptop, but those devices also do other things. Which means that if a nook or kindle owner buys 40 books a year, while an ipad owner buys 5 books a year that kind of matters. Even if there are millions of ipads vs hundred of thousands of dedicated ereaders. Those numbers are completely fabricated, but reading is and always has been a niche. It would be nice if every book sold millions, but because sales are so low, where heavy readers are matters and maybe moreso than what the general public is doing over the longterm.

Posted by thispaceforsale | Report as abusive
 

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