Microsoft has always had a thing for electronic books, but turning that into a successful venture?  That’s a whole other story.  Microsoft entered the electronic book reader business 12 years ago with the release of Microsoft Reader 1.0 as part of its Pocket PC 2000 software.  I purchased and read a number of books on my Compaq iPaq using Microsoft Reader.  Although not exactly a reading optimized device the  iPaq’s very good (for its era) iPaq’s 3.8″ screen (bigger than the iPhone!) along with Microsoft’s ClearType font technology made this a decent early e-reader.  Of course the Pocket PC operating system and the iPaq were targeted at the PDA market, and particularly to users of Microsoft Office, so that it never was really sold as an e-reader.  The Microsoft Reader software came to Windows a few months later, but was never a significant venture and Microsoft finally announced last August that it was being discontinued as of August 2012.  On the whole one can view this as another case of Microsoft being a market innovator, but entering too early and failing to follow through when its original strategy didn’t pan out.

So what were the problems with Microsoft’s e-book strategy?  Well the first is that it attempted to follow Microsoft’s usual game plan, build the software platform and let others do the rest.  E-books need four things: (a) e-reader software, (b) DRM/Sales/Distribution backend software, (c) e-reader hardware, and (d) bookstores.  Microsoft built the first two.  It sold the backed software (and DRM service, which it continues to operate to this day) to major book distributors and a number of electronic bookstores.  In fact they even formed a strategic partnership with Amazon in which the later would adopt Microsoft Reader for its own e-book efforts (and did for a time sell books for Microsoft Reader).  But as the promise of e-books failed to materialize Microsoft’s enthusiasm waned, many players exited e-books, and Amazon went its own way.  So why did e-books fail to take off in the early part of the 21st century?  I can think of two reasons.  First, the lack of a real e-book reading device meant it was always a secondary activity being performed on systems that weren’t appropriate for reading.  Microsoft was likely counting on its Tablet PC efforts to produce better systems for reading, but the Tablet PC never gained much traction either.  Second, the number of books that were available in digital format was extremely small.  You couldn’t actually make Microsoft Reader your primary way of reading books, it was more of a novelty.

In 2006 Sony launched the modern e-reader era with the Sony Reader.  Microsoft employees probably represented a significant part of Sony’s early sales and interest within Microsoft for taking another stab at e-books started to rise.  But Sony sold almost no readers in its first year on the market, leading to questions about Consumer interest in e-books.  In late 2007 Amazon introduced the more innovative Kindle along with a push to accelerate the book industry’s move to digital content.  The Kindle was an instant success, though in absolute numbers the e-reader market remained small through 2008.  It looked like e-book readers would be a significant but very specialized niche.  The Kindle definitely got e-book fans at Microsoft excited (and again many Microsoft employees were amongst that first batch of Amazon customers).  More than that I can’t say, but you can find hints of various activities in this space if you look at the blogs of major “Microsoft Watchers” like Mary Jo Foley.

Now let’s talk about what seems to have happened and why Microsoft likely decided to invest in Barnes & Noble’s Nook.  At some point Microsoft stopped various one-off tablet efforts like Courier and focused its tablet efforts around Windows 8.  Amazon was clearly dominating the e-book space with Kindle, and part of its strategy was to put the Kindle Reader software on all popular platforms.  Windows, for example, already had a Kindle Reader client and Microsoft could expect Amazon to write one for Windows 8’s Metro environment as well.  Moreover, Apple had entered the e-reader business and was pressuring Amazon with its business policies (e.g., you can’t purchase books from inside the Kindle Reader app on the iPad).  So perhaps Microsoft had dreams of Amazon focusing extra effort on Windows 8 as a means of countering Apple.  And not only could Microsoft count on Windows 8 tablets being good Kindle Reader devices, as a generalized platform it would attract other e-reader players like Barnes & Noble’s Nook.  Microsoft appeared to take a “Build it (Windows 8) and they (e-readers) will come” approach to the e-book market.  Amazon had other plans.

Oh, I’m sure Amazon will do a good job on a Windows 8 Metro client.  They actually provided one for the Consumer Preview.  But Amazon decided the best way to counter the iPad was to produce its own media-consumption oriented tablet, the Kindle Fire.  Whether Microsoft had explicit evidence that Amazon wouldn’t do anything special for Windows 8 (e.g., unique features, co-marketing, etc.) or the Kindle Fire simply made it clear that Amazon was going to put its best efforts into its own tablet almost doesn’t matter.  The success of the iPad and the blazing launch of the Fire, both of which have great media consumption stories, along with the tepid response to Android tablets and their weaker media consumption stories, must have made it quite clear to Microsoft that Windows 8 needed more than a “build it and they will come” approach.  Amazon was now a competitor, and the most striking evidence of this was the removal of the Kindle kiosks from Microsoft’s retail stores shortly after the launch of the Fire.

Rumors of a major revamp or replacement of Microsoft’s Zune music and video service have been around for a while, and it is safe to assume Microsoft is working hard on have a service that is a great alternative to iTunes, Amazon, etc.  for Windows 8, Windows Phone 8, and the XBox 360.  The missing part of its media story was e-books.  If “build it and they will come” was necessary, but not sufficient, then Microsoft finally needed to get back into the e-book game.  I don’t know what options they considered, but in the end they settled on the one that holds their best shot at success.

Microsoft and Barnes and Noble had been partners for a long time prior to the start of an intellectual property spat around the Nook.  BarnesandNoble.com (originally a separate BN.COM subsidiary) was built on Microsoft technologies and was one of Microsoft’s biggest success stories during the .com bubble.  BN.COM was also one of the top 5 companies who influenced the development of SQL Server 7.0 and put it into full production during beta.  While Microsoft needed a premier e-book solution for Windows 8, Barnes and Noble was planning to split off the Nook operation (to enhance shareholder value) and had numerous challenges of its own.

One of the challenges with Nook was Microsoft’s patent lawsuit.  Barnes and Noble seemed to adopt a novel defense, basically arguing the Microsoft shouldn’t be allowed to enforce its patent rights because Microsoft was a bully.  I am sure that Barnes and Noble’s lawyers were telling them it was a long shot argument and that at best they’d get some negotiating leverage.  But meanwhile it was a management distraction and I’m sure was sucking up Barnes and Noble’s cash.  And it was the least of their worries.  While the Nook business was healthy, the parent company’s bookstores were losing ground to digital media.  Nook was essentially a U.S. business and Barnes and Noble needed resources and help to take it global.  And the U.S. Justice Department price-fixing charges against U.S. publishers (and Apple) would have the perverse side-effect of strengthening Amazon’s competitive position.  The Nook business needed a strategic partner.  Microsoft and Barnes and Nobles interests were suddenly aligned.

Microsoft committed $600 million to a digital media joint venture with Barnes and Noble.  There is the widely reported $300 million to buy into the joint venture, and the less widely committed $300 million in payments over five years for content.  In return Microsoft gets a share of the revenue from book sales as well as a premier e-reader client for Windows 8.  It might also be getting a Windows 8 (and likely more precisely a Windows RT) based Nook, perhaps to be sold under Microsoft’s name but more likely to be sold as a member of the Nook family.  Barnes and Noble got cash, a very significant partner (especially for entering global markets), and the end of the uncertainty created by Microsoft’ patent lawsuit.

Will Microsoft be able to turn the Nook partnership into a significant winning story for Windows 8?  Will Barnes and Noble find the partnership a significant boost to its ability to compete with Amazon?  Of course the jury is still out on these questions, but in my opinion it was the best shot for both of them.