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Microsoft’s $300 million Nook investment: An Android power grab?

Barnes & Noble Nook Tablet unveil - Nook Tablet homescreenIt has happened. After more than a year of arguing and fighting in and out of court, Microsoft and Barnes & Noble have struck up an agreement over Android. The new deal seems to help both parties. Microsoft will invest 0 million to take a 17.6 percent share in a new subsidiary of B&N that will merge its Nook business and college divisions. In return, Barnes & Noble has agreed to “license” Microsoft’s Android patents and develop a Nook app that will be bundled with Windows 8.

This news is particularly good for Microsoft, which is now collecting a royalty fee for almost every Android device that is sold, despite the fact that Android is a free operating system made by Google and Microsoft has no stake in it. We’ve compared its tactics to that of the mob in past articles, but its tactics have been effective. HTC, LG, Amazon, Samsung, Acer, Barnes & Noble, Viewsonic, Wistrom, General Dynamics, Itronics, Velocity Micro, Onkyo, Compol, and Quanta have all signed Android patent agreements with Microsoft. In Oct. 2011, Microsoft claimed that it had pressured more than 50 percent of Android manufacturers to sign deals with it. Until today, however, it had a staunch enemy in Barnes & Noble. 

B&N to Microsoft: You’re a patent bully

One year ago, Barnes & Noble accused Microsoft of patent bullying after the Redmond tech giant filed a patent infringement suit against the book retailer, which uses Android in its Nook Color, Nook Tablet, and Nook Simple Touch readers. (Motorola is also fighting Microsoft in court.)

“Microsoft has asserted patents that extend only to arbitrary, outmoded, or non-essential design features,” Barnes & Noble wrote in its filing. “Microsoft is misusing these patents as part of a scheme to try to eliminate or marginalize the competition to its own Windows Phone 7 mobile device operating system posed by the open source Android operating system and other open-source operating systems.”

Steve Ballmer Microsoft evilAt the time, Microsoft had some harsh words as well. According to Microsoft’s corporate VP and deputy general counsel Horacio Gutierrez, “the Android platform infringes a number of Microsoft’s patents, and companies manufacturing and shipping Android devices must respect our intellectual property right.” The statement went on to say that the patents are specifically “essential to the user experience, including: Natural ways of interacting with devices by tabbing through various screens [to find information]; surfing the web more quickly; and interacting with documents and e-books.”

We have never found out precisely which patents Microsoft is using to attack Android manufacturers, but the company has always claimed that Linux (which Android is based on) violates a number of Microsoft patents. The software maker never attacked Linux though, likely due to its relatively small size in the market and Microsoft’s many legal problems in the 1990s in regard to perceived anti-competitive behavior and monopoly. After the failure of Windows Mobile and the ensuing dominance of Android, Microsoft seems to have decided that even if its own OS (Windows Phone) doesn’t make a dent in the market, it could still collect money from all Android makers through patent litigation.

Bringing the DoJ into the case

In Nov. 2011, Barnes & Noble kicked things up a notch, and asked the Department of Justice to step in because of Microsoft’s tactics. 

“Microsoft is embarking on a campaign of asserting trivial and outmoded patents against manufacturers of Android devices,” wrote Barnes & Noble, in a letter to Gene Kimmelman, the DoJ’s chief counsel for corporate competition policy. “Microsoft is attempting to raise its rivals’ costs in order to drive out competition and to deter innovation in mobile devices.”

Microsoft, naturally, disagreed with B&N. 

“All modern operating systems include many patented technologies,” said Microsoft in response to Barnes & Noble’s claims. “Microsoft has taken licenses to patents for Windows and we make our patents available on reasonable terms for other operating systems, like Android. We would be pleased to extend a license to Barnes & Noble.”

Reaching a final agreement wasn’t easy, it appears. In February, Microsoft narrowed its patent battle with B&N to streamline its patent case against the retailer, leaving three patents remaining.

Longtime Digital Trends contributor Geoff Duncan tackled the Microsoft vs B&N case in detail this past December. His article has info on pricing, how much Microsoft may be seeking in royalties, the patents in question, and just about everything else you might need to know about the battle, which has now ended.

Microsoft buys a friend, plans next attack

Barnes_&_Noble_Union_Square_NYCAs best we can tell, Microsoft took a financial hit to end this lawsuit. It paid $300 million to get B&N to agree to “license” its patents, at least on paper. We don’t know if Barnes & Noble is paying Microsoft anything at all. In all honesty, we doubt it. Like a good mob boss, Microsoft has recognized a threat and lended a hand to B&N where it was hurting, financially. B&N has been struggling to compete against Amazon’s successful Kindle e-book devices for several years, and its retail stores are, like all book stores, not doing great. This $300 million cash infusion should buy it some time, and out of the deal Microsoft will get a Nook app for Windows 8, making the new OS all the more attractive to new buyers. 

Was Microsoft afraid of the potential repercussions if the battle was to go to trial? Did it decide to buyout Barnes & Noble’s morality and anger so it could add another big manufacturer to its list of Android “licensees”? It certainly appears that this may be the case. Microsoft already has a broad patent deal with Amazon, and could have likely asked it to create a Windows 8 Kindle app.

Microsoft might be more interested in the appearance of a license than the money itself. Instead of having a big company challenge the validity of its patents in court (which could void them), it can now add one more major Android manufacturer to its list of licensees. Even if Barnes & Noble never pays Microsoft a dime, when the software maker attacks its next Android manufacturer, it can say that even Barnes & Noble gave in and is now legally licensed. This could all be about validating the value of Microsoft’s patents. So the real question is: Who’s next?

(Update: A Microsoft rep has told ZDNet’s Mary Jo Foley that B&N will pay a royalty per device, but we don’t know how much. It could be 1 penny or $10 or $100 — we don’t know)