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Barnes & Noble, Microsoft plan e-book unit; Bookseller, computer giant joining to promote Nook, textbook business

Books and bits united Monday as Microsoft provided an infusion of money to help Barnes & Noble compete with top electronic bookseller Amazon. In exchange, Microsoft gets a long-desired foothold in the business of e-books and college textbooks.

Microsoft Corp.'s $300 million investment sent Barnes & Noble Inc.'s stock zooming up $7.07, or 52 percent, to close trading at $20.75. Microsoft's stock rose 4 cents to $32.

The two companies are teaming up to create a subsidiary for Barnes & Noble's e-book and college textbook businesses, with Microsoft taking a 17.6 percent stake.

The agreement underscores the importance of electronic bookstores as traditional booksellers and technology companies jockey for position in the increasingly competitive market. While no definitive numbers exist, e-books are believed to account for about 20 percent of book sales in the U.S.

For Microsoft, the investment is a way to get back into the e-book business. It has dabbled in the field since at least 2000 but never developed much traction.

Amazon blew the market open with the 2007 launch of the Kindle e-book reader, creating a potent challenge to Barnes & Noble's brick-and-mortar bookstores.

Major Microsoft competitors Apple and Google now have their own e-book stores. All three companies are building businesses that encompass hardware, software and content in an "ecosystem." E-books and e-readers are part of the puzzle.

With that perspective, the deal is very important, said Walter Pritchard, an analyst with Citigroup. But he doesn't expect any near-term financial impact from the deal, noting that even if the Microsoft-Barnes & Noble venture is successful, it leaves Barnes & Noble's Nook a distant second in the e-reader market, behind the Kindle.

The deal gives Barnes & Noble ammunition to fend off shareholders who have agitated for a sale of the Nook e-book business or the whole company, but the companies said Monday that they are exploring separating the subsidiary, provisionally dubbed "Newco," entirely from Barnes & Noble. That could mean a stock offering, sale or other deal.

The deal also puts to rest concerns that Barnes & Noble doesn't have the capital to compete in the e-book business with market leader Amazon.com Inc. and its Kindle, said analyst David Strasser at Janney Capital.

The investment also means that Microsoft will own part of a company that sells tablet computers based on Google Inc.'s Android, one of the main competitors of Windows Phone 7, Microsoft's smartphone software.

Microsoft also said the deal means that there will be a Nook application for Windows 8 tablets, set to be released this fall. The app is likely to get a favored position on Windows 8 screens.

There's already a Nook application for Windows PCs but none for Windows phones.

William Lynch, the CEO of Barnes & Noble, said Nook software will continue to be available on devices like the iPhone that compete with Windows Phone.

The Nook has pleasantly surprised publishers, who worry about Amazon's domination of the e-market. Unveiled to skeptical reviews in 2009, the Nook is estimated to account for about 25 percent of the U.S. e-book market. The Nook helped to cut Amazon's share from what was believed to be 90 percent to around 60-65 percent.

Microsoft has a long-standing interest in the e-book field. It launched e-book software in 2000 but was never able to build a substantial library of books. It's discontinuing the software Aug. 30.

Barnes & Noble, based in New York, currently runs 691 bookstores in 50 states.

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