What could Microsoft gain from buying Nook?

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More than a year ago, Microsoft invested $300 million in Barnes & Noble’s plan to spin-off its Nook business. At the time, the deal promised a few tablet-centric possibilities. Would Nook tablets dump Android in favor of Windows? Would the Nook catalog be part of an entertainment-centric device like the still-mythical Xbox Surface?

Twelve months later, all Microsoft has to show for its Nook investment is a Windows 8 modern UI app—an app that probably would have landed in the Windows Store anyway. But new reports suggest that hasn't soured Steve Ballmer and co.'s taste for the Barnes & Noble spin-off. In fact, Microsoft may have even bigger plans for Nook.

TechCrunch recently got its hands on internal documents that show Microsoft is pondering an outright acquisition of Nook Media LLC for a cool $1 billion.

But what use would Microsoft have for a struggling e-book business? For $1 billion, this has to be more than just a strategic acquisition to keep Nook out of the hands of competitors like Google or Amazon.

Devices and services and Nook, oh my

Microsoft chief Steve Ballmer famously said last October the company was transitioning into a “devices and services” company.

It seems the currently available Nook hardware doesn't have much to do with the alleged deal. The documents seen by Techcrunch say that Nook e-readers and tablets would be phased-out towards the end of the company’s fiscal year 2014. Nook would then transition into a purely digital business, distributing its apps and catalog of reading material on third-party devices. It makes sense; while Nook hardware sales tanked hard over the holidays, digital content sales actually rose 13 percent.

Rumors about the end of the Nook surfaced in February.

Selling books is definitely a service, on the other hand. Microsoft is no stranger to peddling content, with Xbox Music and Xbox Video already available on Windows 8 and the Xbox 360. Millions of people are already invested in the Nook ecosystem.

"It appears that Microsoft [with its rumored Nook buy] is looking for a content partner brand that they can use to help develop content opportunities beyond the movies and music they provide today through Xbox Live," says Stephen Baker, vice president of industry analysis at market research firm NPD.

Adding "digital print" to music, video, and gaming would complete the company’s entertainment offerings. Nook could also become a default app built into Microsoft’s software, and would likely continue to be sold on other platforms as well, such as Android and iOS. Office aside, Microsoft has shown a willingness to expand its reach to competing operating systems.

Schooling the education market

But Nook is more than just novels, biographies, magazines, and comic books.

Nook is also a big player in the emerging digital textbook market with products like Nook Study, a textbook reading app for Windows and Mac PCs. For Microsoft, Nook could be one part of a much bigger play into the education market. Students, especially university students, are a prime target for new Windows PCs and Office 365 subscriptions.

A Microsoft-owned textbook app opens up an opportunity to create new devices for the education market, such as a tablet optimized for reading textbooks and working with Office.

"A 9-inch tablet running the Windows mobile OS makes sense,” Gartner analyst Allen Weiner wrote in April 2012, shortly after Barnes & Noble and Microsoft announced their initial Nook investment. Weiner argued the popularity of Office with students for note taking (OneNote) and document creation (Word, Excel, PowerPoint) made a 9-inch tablet a great idea for students.

A Nook-centric Surface slate would be useful typing in the classroom or reading in the bedroom.

Weiner was unavailable for comment before press time, but his year-old argument still sounds like a compelling reason for Microsoft to snap up Nook. Instead of using a "Windows mobile OS," as Weiner argued pre-Windows 8, it’s more realistic to think about a tablet running Microsoft’s primary OS. The 9-inch form factor makes more sense for the education market than the trendier 7-inch mini-tablets Microsoft and its partners are reportedly working on.

If you just want to read a novel or the latest issue of The Economist, then a 7-inch slate suits your purposes well. But when you’re talking about textbooks with complicated charts, models, timelines, and other graphics, a larger surface area is needed if you want to make sense of them.

A 9-inch, Nook-centric Surface slate could prove pretty compelling for school-bound students if the price is right, especially if it's powered by Intel’s upcoming Bay Trail Atom processorsAu naturel for the textbook reading and Type Cover-equipped for the classroom, a Nook Surface could even carve a viable niche for the otherwise gloomy Windows RT operating system.

But that’s all speculation. For now, while we can say that a deeper Microsoft-Nook marriage is indeed chock-full of intriguing possibilities, the alliance has accomplished very little to get excited about thus far.

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