Microsoft and Barnes & Noble settle patent dispute; create new subsidiary

Microsoft and Barnes & Noble settle patent dispute; create new subsidiary

Summary: Microsoft and Barnes & Noble just became unlikely allies, settling a patent dispute and forming a new subsidiary in one fell swoop.

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Microsoft and Barnes & Noble have settled their patent dispute and are forming a new venture to focus on e-reading and the education market.

On April 30, the pair announced the formation of NewCo, which will include Barnes & Noble's digital and college businesses. NewCo will create a Nook e-reading application for Windows 8, as well.

Barnes and Noble will own 82.4 percent of the new subsidiary, and Microsoft will make a $300 million investment in the still-to-be-named NewCo and hold a 17.6 stake in the company. (None of Microsoft's employees will be moving to the new subsidiary, a spokesperson told me.)

Here are a couple of things I found interesting about today's announcement:

1. The Microsoft representative quoted in the press release is Microsoft President Andy Lees. Lees was moved from heading the Windows Phone business back in December 2011. His new role, Microsoft execs said at that time was unspecified special projects that would be focused on Windows Phone and Windows 8. Today's press release doesn't mention Windows Phone at all, but perhaps this new subsidiary also will be doing a Nook reader app for Windows Phone 8. Update: A Microsoft spokesperson said Lees was the one spearheading this deal for Microsoft.

2. The settlement piece of today's announcement was buried in the press release. I'm thinking the creation of NewCo was one of the terms of the settlement, though so far, neither company is sharing any details of how their cantankerous patent dispute was tabled. B&N was one of the last companies to hold out from paying Microsoft royalties for publicly unspecified patents which Microsoft is claiming are infringed on by Android. Was today's creation of NewCo predicated on B&N settling with Microsoft? Does B&N still have to pay Microsoft royalties on every Nook sold as part of the settlement? (Update: The answer to that one is yes, according to a Microsoft spokesperson.) No word on any of these questions so far, and I'm kind of doubtful there will be any more specifics shared about the settlement.

3. Microsoft execs have been playing up in recent public appearances the pending availability of some kind of a dedicated Metro-based e-reader. This has seemed odd to a number of us Microsoft watchers, given the official Microsoft stance that Windows 8 tablets running a Kindle and/or Nook application would be just as good an e-reader as a dedicated device. Now, given today's NewCo announcement, I wouldn't be surprised to see a Windows 8-based Nook reader.

(Here's some background on this, according to one source: One of my contacts had told me a while back that Microsoft was working on an e-reader with B&N. The plan supposedly was that Microsoft would build the e-reader and B&N, the bookstore. Supposedly, my contact said, B&N dropped out, and shortly thereafter, Microsoft was working on the Courier, which could double as both a notetaking and reading device.)

Microsoft and B&N are holding a press conference this morning (8:30 am ET) and I'll update this story with more if and when there's more to say....

Update: It sounds like a Windows-powered reader may be in the works, but not necessarily Windows 8-powered.

Topics: Windows, Hardware, Legal, Microsoft, Mobility, Operating Systems, Software

About

Mary Jo has covered the tech industry for 30 years for a variety of publications and Web sites, and is a frequent guest on radio, TV and podcasts, speaking about all things Microsoft-related. She is the author of Microsoft 2.0: How Microsoft plans to stay relevant in the post-Gates era (John Wiley & Sons, 2008).

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109 comments
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  • At a guess

    MS would have won, they offered B&N a way to save some money, but would also force them to invest in windows 8 and windows phone 8, meaning a win for MS either way you look at it.

    I guess all the people saying that B&N would destroy MS in the courts, and then all the android distros would rise up against them similar to the machines in the matrix were a bit off the mark.
    danjames2012
    • Agreed.

      It appears that Microsoft allowed Barnes and Nobel a way out that will benefit them both.

      This makes it much harder now for Google/Motorola, though I imaginbe that Google would rather pay, then to partner with Microsoft.
      :|
      Tim Cook
      • Not exactly

        Microsoft wasn't having any success with their anti-android lawsuits against B&N as the ITC made a preliminary ruling in favor of B&N.
        DonRupertBitByte
      • It sounds more like an MS win

        DonRupertBitByte.

        B&N having to pay MS would add stress to their already existing finacial problems, but to approach MS with an offer that would benefit MS more then a simple couple of million dollar payments, an opportunity only someone like B&N could offer, (as how many of the others who settled do what B&N does?)

        From MS's standpoint, it likely makes more sense to get continuing (possibly higher) revenue from a partnership like this, then a couple of million dollar payments evey so often.
        William Farrel
    • Not at All

      This, like most settlements is a way to satisfy both parties from a financial standpoint. This could just as well be spurred by an impending Microsoft loss as a win. Both parties benefit financially from the settlement agreement, which we will never see of course. This is a way to end the case expeditiously without dragging it out and making both parties spend a lot more money on legal fees.

      Actually, this would more indicate that Microsoft was at a disadvantage in the case than Barnes & Noble because of the possible outcomes. If Barnes & Noble won the case, it would be a significant disadvantage to Microsoft while it wouldn't really benefit Barnes & Noble much at all besides the case being over. On the other hand if Microsoft won, then it would give them further advantage in future endeavours to extract the same license fees in future cases, while being a strong disadvantage to Barnes & Noble.

      Microsoft had much more to gain by pressing the case to an end if it were so sure that they would win. The only reason for them to settle is if their odds of winning were not as great as all that. On the other hand, Barnes & Noble had little to gain with a win, and much to lose with a loss, so settling in a way that provided them with an actual gain was a big inducement for them to agree.
      CFWhitman
      • Not so. BN had a lot to gain from a win. A huge chunk of cash not going out

        to MS for all previously sold and future sold nooks. BN would have been much better off starting this new partnership without any royalty payments to MS for android based nooks, which despite this partnership will continue to be sold. That they agreed to pay the royalty tells you everything you need to know
        Johnny Vegas
      • That's Just Not Losing

        @Johnny Vegas
        What you say is not a gain, it's just the absence of a loss. B&N doesn't gain anything from it. What makes you think this partnership would happen at all without the court case to induce it? This is a way for B&N to not actually pay a cent to Microsoft, with no risk of losing, and for Microsoft to still maintain that B&N devices are all licensed by them. They didn't agree to pay any royalty. They agreed to be credited for paying royalties as part of this new venture. In fact they agreed to make a profit from the venture rather than having to pay anything to Microsoft.
        CFWhitman
      • Avoiding a loss is not a gain

        It's merely maintaining the status quo. This really works well for both MS and B&N because now they have the beginnings of an integrated platform system that could compete with Amazon and Apple. If it works, then it's a big gain for both of them.
        Vulpinemac
      • I think you're wrong, It makes a lot more sense that MS had more to gain

        by [b]not[/b] pressing the case.

        What would MS get once they won? A few million dollars? Wow, for a company that earns billions per quarter, that is really a not a large amount by any stretch of the imagination.

        What they would have lost? A partner with books to compete against Amazon and Apple.

        You tell me, what is the better deal for Microsoft going forward? Cash? they got that, and plety of it. Books? well, they don't have them, and would likely want that.

        What would you have chosen?
        William Farrel
      • The winner pays $300 million?

        @CFWhitman : I think you're probably right. Microsoft's paying $300 million for a piece of the Nook action doesn't sound like the behavior of a company that felt it had a slam dunk case. B&N has gained some financial backing at a time when it is quite useful, and B&N and Microsoft together may offer a little stronger fight against the Amazon juggernaut.

        Granted, it predates this settlement, but the new Nook SimpleTouch with a backlight is the first e-reader that has actually tempted me. I'm a huge Amazon fan, but there are times when I am concerned by their market power. Alternatives are good.
        S_Deemer
      • S_Deemer, So you would

        "cut off your nose to spite your face?". As others have pointed out, Microsoft took the route that would benefit them in the long run by allowing them access to a company with an online book presence, and an established device to deliver thyem to..

        You appear to believe that if Microsoft had a "slam dunk" they would have taken it, and walked away from a chance to partner with a company that had a better business proposition, and something else they wanted.

        Much like a man who walks away from free land and a farming class, where he has the chance to learn how to feed himself going forward, instead taking a one time payoff of a basket of apples.

        :|
        Tim Cook
      • Couple of Indications that B&N May Have Had Upper Hand

        One thing that Microsoft had to gain by pressing the case was future support for their patent license claims against Android. If they actually won a court case, there would be much less chance that another company would choose to go to court. They still haven't won a court decision, so the outcome of such a decision is still in doubt. This settlement neatly sidesteps any court decision against Microsoft's patent claims.

        Another factor is that the details of the financial exchanges going on are nicely hidden. If this settlement is not favorable toward Microsoft's patent claims, then Microsoft would have more to gain by hiding them. So if Microsoft had a strong position in the case, then that would mean that B&N probably made the stipulation for hiding the details, even though it would not be as important for them to hide them in either case.

        So basically, this settlement deal would have to be important enough to Microsoft for them to make these concessions just because they really wanted the new venture. It's not impossible, but when you weigh the factors, also considering that Microsoft had other options for teaming with a content provider, it seems somewhat doubtful.

        It seems more likely that either the outcome of the case was very much up in the air, or else that it was looking good for B&N, so Microsoft came up with this deal to create a better outcome for B&N than either decision in the case would provide.

        One thing is for certain: This settlement in no way indicates that Microsoft was winning the case.
        CFWhitman
    • another outrageous racketeering job by M$

      against innocent companies. The DOJ must investigate this patent abuse scandal!
      The Linux Geek
      • My turn...

        ...seeing as no-one else can be bothered today. Seriously, your posts are nothing more than a spoilt child, ranting because their preferred option doesn't have the upper hand. If you at least tried to construct a fact based argument not rooted in your own biases, perhaps you wouldn't be the laughing stock that you currently are.

        Seriously, relax, take a step back, find solid logic and evidence, construct an adult argument. Its not that hard and will be significantly more rewarding than being down-voted like the "martyr-for-the-cause" as has been your MO for so long.
        mountjl
      • While I don't agree with you, ...

        ... maybe you're right that the DoJ should investigate. Then they could waste more of our tax dollars on nonsensical litigation.
        Vulpinemac
      • LOL - wow that was a long

        smoke break - back to the fry station little boy.
        TheBottomLineIsAllThatMatters
    • Are you mad?

      B&N is struggling financially, and the outcome of their legal battle with a corporation with $100 billion war chest is a $300 million investment in a company they hold majority stick in. This is a win for B&N. MS meanwhile gets to save face and can still claim unspecified, unchallenged patents as multibillion dollar assets.
      tkejlboom
      • I believe that he is mad

        :|
        Tim Cook
    • Great strategy!

      Based on the premise that if you tie two sinking ships together they will stay afloat longer.
      john_gillespie@...
  • royalty-bearing

    Hi. Yes, MS is saying that B&N has taken a license for every Nook. But they won't say whether there are any additional payments coming to them from B&N and/or whether their contribution to NewCo is exceeded or not by these payments... (I asked). Thanks! MJ
    Mary Jo Foley