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5/1/2012
08:37 AM
Paul McDougall
Paul McDougall
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Barnes & Noble Deal Shows Microsoft's Patent Power

Bookseller could have continued expensive court battle with Microsoft over Android-based Nook, or cut Redmond a sweetheart deal. It chose the latter.

In the end, Barnes & Noble had little choice but to knuckle under to Microsoft. Not only is BarnesandNoble.com losing money, it faced the prospect of a crippling patent fight with one of the most cash-rich companies on the planet. Microsoft sued B&N last year, claiming the Android-based Nook e-reader violates five of its patents. Microsoft, as it has done with so many other Android and Linux device makers, made Barnes & Noble an offer it couldn't refuse.

Now Barnes & Noble can go forward with its e-book strategy without fear of legal reprisals from Redmond. Under a deal announced Monday, the bookseller will spin off its e-book and reader business into a new subsidiary, in which Microsoft gets a 17.6% stake. In exchange, Microsoft will pay Barnes & Noble $300 million and drop its patent claims.

But, as there is often with deals involving Microsoft, there's a catch. The new, yet-to-be named subsidiary (for now it's just called NewCo), must pay license fees to Microsoft for technologies covered by patents at issue in the lawsuit. Barnes & Noble was already likely selling its Nook e-readers and tablets, made by Foxconn, at a loss in order to get its digital storefront into as many hands as possible--now it will lose even more on each device sold.

[ Do software patents do more harm than good? See Should Software Patents Be Abolished? ]

Microsoft is the clear winner here. It has, in essence, won its lawsuit against Barnes & Noble without ever having to go before a jury. And it gets a significant stake in the only part of B&N with any real growth potential, and it will get a piece of the action on every Nook sold.

Don't underestimate that last perk. It's hard to know how many Nook devices Barnes & Noble is selling because it won't disclose those numbers. Likewise, we don't know how much in licensing fees NewCo will pay Microsoft per Nook. But we can make some educated guesses.

iSuppli estimates that Barnes & Noble sold 1.9 million Nook tablets in the fourth quarter. That doesn't count other Nook products, like the Nook Color or Nook Simple Touch. Meanwhile, analysts' estimates of the licensing fees Microsoft gets from other Android device makers, including HTC, Acer, and ViewSonic, vary from about $5.00 to $15.00 per unit. So a highly conservative estimate has Microsoft making about $15 million per quarter from this deal in license fees alone.

That doesn't include proceeds from profits earned by Barnes & Noble's lucrative college textbook business, which is going digital and is being rolled up into NewCo.

Barnes & Noble, with its majority stake in NewCo, is still stuck with a business that lost $233 million over the past nine months and saw operating expenses balloon as it tried to keep pace with Amazon and Apple. "Microsoft coming in here really does very little for Barnes & Noble," noted Fusion Analytics analyst Josh Brown, in a CNBC interview Monday.

So how did Microsoft get such a sweetheart agreement? The same way it got licensing pacts that cover 70% of Android devices on the market. The company's vast patent trove, and vast army of lawyers, allows it to do deals on its terms, or else. It also explains why it was willing to pay more than $1 billion for 800 AOL patents, even if it did flip most of them to Facebook. "This is part of a broader trend at Microsoft, to force these strategies and these partnerships without going out and doing an acquisition," said BGC analyst Colin Gillis, also on CNBC.

Microsoft can't be blamed for using its intellectual property assets to get the best deals it can. It's in business to make as much money as possible for its shareholders and that's what its management is paid to do. And Microsoft isn't the only one playing this game. Google is amassing its own patent stockpile as it too embraces a competitive strategy based on MAD (mutually assured depositions). It recently agreed to pay $12.5 billion for Motorola, mostly for the company's 24,000 mobility patents.

But the fact that patents are becoming less about protecting innovation, and more about giving industry giants a cudgel with which to bludgeon rivals? That may be an argument for patent reform. As a starting point, the United States Patent and Trademark Office might consider rules that would require companies that amass patents to legitimately use them--or lose them.

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EVVJSK
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EVVJSK,
User Rank: Apprentice
5/1/2012 | 5:06:24 PM
re: Barnes & Noble Deal Shows Microsoft's Patent Power
Let's all hope to G0d that it means some of these major companies have woken up and see that the litigation battles they have been fighting waste time and resources better spent on innovation, marketing, and keeping customers happy. Patent power maybe, but in the long run, it is agreement and cooperation that is going to make a company successful. Lessons too many companies have to be reminded of far too frequently.
ANON1237925156805
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ANON1237925156805,
User Rank: Apprentice
5/1/2012 | 7:12:49 PM
re: Barnes & Noble Deal Shows Microsoft's Patent Power
No finger pointed at MS here; everyone is doing what they do and few are doing it as well. But this whole movement is an abuse of patent law as it was intended to function.

Patents were never intended to be owned as objects per se, divorced from the actual production of properties. They were intended to be tied to the production of products, whether by the inventor, the company for which the inventor worked, or a licensee of the patent.

Now they are speculated as recklessly as equities and options. This isn't good for anyone. If B&N is mortally harmed by this deal, how will the resulting bonanza for Amazon benefit Microsoft or any other competitor? How much will it harm the publishing industry and consumers who benefit temporarily from Amazon's depressed prices but can be confident of predatory behavior once its monopoly status is secure?

I'm with you on patents. Use it or lose it. Microsoft deserves every nickel it gets for the Kinect technology but a big fat Easter Egg for patents that it finagled in a shady deal from a dying enterprise.

Crosscliq
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Crosscliq,
User Rank: Apprentice
5/2/2012 | 12:53:12 AM
re: Barnes & Noble Deal Shows Microsoft's Patent Power
Great to see another large brand looking at adopting NFC. My company http://crosscliq.com is working with several large retailers on integrating NFC into their brick and mortar locations as well as in their marketing materials. 2012 is slated to be the YEAR OF NFC. Isis is debuting, Iphone5, and a dozen more Android, Window's Mobile Phones, and Blackberry phones are launching with NFC. Should be fun!
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