Microsoft and Barnes & Noble write their own love story

LAST July Barnes & Noble gave a presentation to the antitrust division of America's Department of Justice. In slide after slide, the bookseller laid into Microsoft. The software giant, it thundered, was guilty of "anti-competitive behaviour" in demanding royalties from makers of mobile devices (such as the Nook, Barnes & Noble's e-reader) that used Android, Google's open-source mobile operating system. The bookseller sniffed that Microsoft owned only "trivial" patents and reminded the department of the software company's past trespasses against competition.

Nine months later, the bookworms and the geeks are the best of friends. On April 30th Barnes & Noble said it was creating a subsidiary, called NewCo for now, into which it would put Nook and its "college" business, which has 641 bookshops on American campuses. Microsoft is putting up $300m for 17.6% of NewCo. People will be able to buy and read e-books through a Nook application for Windows 8, a new incarnation of Microsoft's operating system that is due to appear in a few months. Microsoft will pay NewCo an advance of $180m over three years for such purchases, plus $125m over five years to buy content and develop technology. The squabbles over patents have been settled: Microsoft is giving Barnes & Noble a licence for the Nook and will get royalties in return. For now at least, the Nook will remain an Android, not Windows, device.

The agreement values NewCo at $1.7 billion, more than twice Barnes & Noble's market capitalisation before it was announced. The bookseller's share price rose by 50% on the day of the deal—which tells you what investors think of the dead-tree end of the trade. The alliance should bring Barnes & Noble not only cash but also new readers of digital books and magazines, especially outside the United States. In the fourth quarter of 2011, according to Tom Mainelli of IDC, a research firm, Barnes & Noble accounted for one-fifth of the 7m e-readers shipped in America—against a mighty three-quarters for Amazon, maker of the Kindle (see chart). But Barnes & Noble shipped no Nooks elsewhere, which helps explain why it had only 14% of the global market. Via the Nook app, non-Americans will also be able to leaf through Barnes & Noble's digital catalogue.

Microsoft is in effect buying a second bash at a market where it made an early but unsuccessful start. It launched its own e-reader software all of 12 years ago. The deal with Barnes & Noble, bringing lots of content with it, may give people an extra reason to buy Windows 8 tablets (a likelier choice for e-reading than smartphones, laptops or desktops) when they appear.

The bundling of Barnes & Noble's college business into NewCo indicates a hope that a fair few of these customers will be students. Allen Weiner of Gartner , another research firm, suggests that through campus bookshops Barnes & Noble could sell Windows devices pre-loaded with course material. Of course, others are after students' dollars too. Apple recently started selling interactive digital textbooks for the iPad, far and away the biggest-selling tablet (among its publishing partners is Pearson, part-owner of The Economist). But Mr Weiner points out that Microsoft and Barnes & Noble have some advantages. Lots of students write notes and essays with Microsoft's Office software, which is not available on the iPad. And although Amazon sells and rents a lot of paper textbooks, it has not done much with digital ones.

The tie-up with Barnes & Noble makes three of a kind for Microsoft: cheap deals with struggling but established partners in markets where it is weak and sees a chance to do much better. In 2009 it struck an agreement with Yahoo! in online search. Last year Nokia became the prime conduit for Windows in smartphones. With Barnes & Noble it is having another stab at e-reading. Unlike the books on the Nook, this tale is still being written.