Apple And Amazon Should Rejoice As Microsoft Morbidly Embraces Nook

TechCrunch reports that Microsoft may spend $1 billion to buy Nook outright from Barnes & Noble . In the pre-market Barnes & Noble stock moved up as much as 30% and was still higher by nearly 20% on the day in the afternoon. Microsoft has an existing investment in Nook of about one-sixth of the enterprise.

Barnes & Noble has done an incredible job with Nook even though it is nowhere near as popular as the Kindle lineup from Amazon or iPads from Apple .

Amazon started as a book seller.  No wonder it is the leader in the eReader market with its Kindle line of devices. Barnes & Noble,  with a century of pedigree in books, is the number two player in the e-reader market.  However, the Nook's share has been stagnant.  In contrast, Apple has been rapidly increasing its share of the market.

Of special note is that Nook devices run on Google Android.  Tablets from Barnes & Noble, Nook HD and Nook HD+ have been weak products in terms of market share against other Android tablets and iPads.

The question is what will Microsoft do with Nook?  In my analysis, Microsoft will probably simply kill it on purpose.  The reason is that Microsoft will have no interest in continuing to sink money into a weak performing Android line of devices.  This will indeed be good news for Amazon and Apple.  Killing off any competition is good.  Although I have no private knowledge, I would think that there is joy in Cupertino and Seattle over this development.

The Department of Justice should have no objections based on Clayton Act to Microsoft killing Nook.  The reason is that Microsoft will not be killing Nook to restrain trade or to gain market share.  Killing Nook will simply be seen as a prudent business decision in a space where competition is intense.  Killing Nook devices will not reduce competition because Microsoft is likely to aggressively market an app in the eReader space.

Microsoft has already shown its hand, it wants to strengthen the ecosystem for its Surface line of tablets and Windows 8. This was the motivation behind Microsoft’s initial investment in Nook.  So far Microsoft has failed in execution as nothing more than a Nook app for Windows 8 has come out of their investment.

An outright purchase of Nook will give Microsoft complete control of Nook’s ecosystem and in all likelihood, Microsoft will attempt to migrate this ecosystem to Windows 8.  Microsoft may also incorporate some features of Nook ecosystem such as book discovery in Windows 8.

A purchase of Nook is certainly better for Microsoft compared to creating an eReading ecosystem from the ground up.  However, both Amazon and Apple are so far ahead that it will be hard for Microsoft to catch up in spite of the purchase.

From an investment perspective, the speculated purchase price of $1 billion is considerably less than many estimates.  The estimates have been around $1.7 - $2.0 billion based on the valuation given to Nook in Microsoft's prior investment.  The driving force in the short-term for Barnes & Noble will be that the short interest of  the float is 31.5%.   Such high short interest can easily lead to a massive short squeeze to mid to high $20s.

Any deal will not be material to the stock prices of Google, or Microsoft.  The uncertainty generated by the deal may help Apple to accelerate its share of the eReader market and create a positive sentiment towards its stock.  Amazon stock may move up because of the positive sentiment towards Kindle devices that may be generated by Microsoft buying Nook.

Disclosure:  Subscribers to The Arora Report are long Apple.