The real story behind the big Microsoft and B&N deal

How could Microsoft and Barnes & Noble launch a historic joint venture when they were at each others' throats a few month ago? Read on

I figure the first Windows RT-Nook hybrid will be called a Wookie.

Yesterday, Microsoft and Barnes & Noble surprised the world -- especially the stock market -- with an astounding joint venture that has the potential to change the tablet scene permanently. To understand what really happened, you need to look at the people involved.

Last March Microsoft sued B&N, claiming Nook and Nook Color's Android implementation infringed on Microsoft's patents. "We have tried for over a year to reach licensing agreements with Barnes & Noble, Foxconn, and Inventec," said Horacio Gutierrez, Microsoft vice president and deputy general counsel. "Their refusals to take licenses leave us no choice but to bring legal action to defend our innovations and fulfill our responsibility to our customers, partners, and shareholders to safeguard the billions of dollars we invest each year to bring great software products and services to market."

B&N fought back, filing a countersuit in November that listed more than 100 examples of prior art, rendering Microsoft's patents silly if not untenable. According to the filing, "In addition to the oppressive restrictions and prohibitions in Microsoft's proposed licensing agreement, Microsoft is also demanding exorbitant licensing fees for the use of Android."

Things went downhill rapidly from there, with B&N divulging numerous details about Microsoft's demands and tactics. The spat wasn't pretty, and it was very public.

Meanwhile, last December Steve Ballmer shocked the mobile world when he removed Andy Lees as president of the Windows Phone Division. As I explained at the time, the move cleared the way for Terry Myerson -- who currently heads the Windows Phone Division, but only has the title of corporate vice president -- to move under Steve Sinofsky, as the Windows Phone effort was slowly absorbed into the Windows borg. I believe that organizational transition is still in progress and will become even more obvious as Windows Phone 8 "Apollo" materializes. Technologically, Windows Phone is joined to Windows 8 at the shoulders and ankles.

At the time, Ballmer announced that Andy Lees would "work for me on a time-critical opportunity focused on driving maximum impact in 2012 with Windows Phone and Windows 8."

See a pattern forming here?

In January, Barnes & Noble officially announced it was looking at spinning off the Nook. "In order to capitalize on the rapid growth of the Nook digital business, and its favorable leadership position in the expanding market for digital content, the company has decided to pursue strategic exploratory work to separate the Nook business... We see substantial value in what we've built with our Nook business in only two years, and we believe it's the right time to investigate our options to unlock that value."

Yesterday Microsoft announced it was investing $300 million in a 17.6 percent stake in the Nook (and College businesses) venture. B&N retained 82.4 percent. At that valuation, the joint venture was valued at $1.7 billion, and B&N's part was valued at more than $1.4 billion. When the markets closed prior to the announcement, B&N's entire market capitalization, for the whole company, was just $800 million.

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