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Who wins from Microsoft's foray into digital books?

The digital book war now pits three of the technology world's biggest powers against one another.

On Monday, Microsoft Corp. announced it was investing $300-million (U.S.) in Barnes & Noble Inc. 's Nook digital reader. The move, which propels the software giant into direct competition with Apple Inc. and for the eyeballs of e-book aficionados, came as a shock to the stock market, which had been viewing Barnes & Noble as a dying name.

The bookseller's shares bolted at the start of trading and finished up nearly 52 per cent. Prior to the gain, the shares had lost two-thirds of their value over the past five years as book buyers deserted conventional bricks-and-mortars retailers.

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In return for its investment, Microsoft gets a 17.6-per-cent stake in a newly formed subsidiary that will contain Barnes & Noble's e-book and college education book businesses. The deal values the subsidiary at $1.7-billion.

While Microsoft's investment does nothing to alleviate the stress on Barnes & Noble's traditional bookstores, it does wonders for reshaping the digital side.

Microsoft is preparing to launch its Windows 8 operating system later this year. Following Monday's deal, it is planning to add the Nook as an application to that operating system.

That will make the software giant an instant contender in the big leagues of online publishing. It may also rejuvenate Barnes & Noble's faltering bottom line. and Apple now dominate the digital books space with their tablets, and the impressive sales of those devices have helped drive both companies' share prices to recent record highs. The Nook has struggled to keep up with the competition, but Microsoft's deep pockets should provide considerable support.

The stock market, which blew it on valuing the Nook, seems perplexed about what this deal means for everyone else. Microsoft, which seems to have a lot to gain here, saw its shares trade flat on Monday. Apple was down 3.2 per cent and was up 2.2 per cent – with both companies likely having the most to lose should the new strategic partnership between Microsoft and Barnes & Noble bear fruit.

Meanwhile, you have to wonder what this shakeup means for Research In Motion Ltd. The Canadian company has been struggling with sliding market share for its smartphones and a disinterested reception for its tablet.

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One of the big hopes among investors was that a well-heeled technology company would scoop it up on the cheap – but with Microsoft apparently looking elsewhere for deals, that prospect now seems dimmer than ever.

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More

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