Microsoft Nook Deal: Winners & Losers (Update 1)

Updated from 11:26 a.m. EST to provide analyst comments regarding in the seventeenth paragraph.

NEW YORK (TheStreet) -- Barnes & Noble has pulled itself from the brink of destruction, and teamed up with Microsoft to provide a formidable third entry in the tablet market.

The partnership sees Microsoft and Barnes & Noble teaming up to form a joint venture for the NOOK tablet, bringing together Barnes & Noble's digital and college businesses.

The tablet market has been dominated by Apple's iPad, but the joint venture makes Barnes & Noble a formidable player in the space. This could also impact other tablet players who aren't used to going up against the marketing muscle of Microsoft and Barnes & Noble.

Here are the winners and losers from today's announcement:

Barnes & Noble: Winner

Barnes & Noble is the obvious winner here, with shares soaring some 90% on the back of this news. The partnership values the retailer at $1.7 billion, and still allows Barnes & Noble to own 82.4% of the new company, tentatively titled 'Newco' in the companies' statement.

The deal also allows Barnes & Noble to spin off its NOOK business, which it had previously talked about doing, and get a $300 million cash infusion from a strategic partner that has far greater marketing and advertising muscle.

"The two companies agreed on a valuation for "Newco" that was a shade over 2x the market cap of Barnes & Noble before the deal, telling me little is expected from the Barnes & Noble retail assets in the future, which is kind of intriguing as it could be viewed as undervaluing the entire company," wrote Real Money contributor Brian Sozzi.

Barnes & Noble CEO William Lynch was excited about the deal, as it expands the NOOK's customer base. "Microsoft's investment in Newco, and our exciting collaboration to bring world-class digital reading technologies and content to the Windows platform and its hundreds of millions of users, will allow us to significantly expand the business," Lynch said in the press release.

"NOOK has several years runway, and it gives Barnes & Noble more money to keep going and keep fighting," said one hedge fund analyst, who wished to remain anonymous.

Microsoft: Winner

Apple dominates the tablet space, selling new iPads as fast as it can make them. Microsoft wants a piece of this action.

The software giant's $300 million investment breathes new life into Barnes & Noble, while getting Microsoft closer to a company already established in the tablet market.

The partnership starts off with a NOOK app for Windows 8, but there is the potential for much more. The NOOK runs on a modified version of Google's Android operating system, and there's the possibility for Microsoft to bring Windows 8 to the NOOK, thought that may not happen soon.

"If Microsoft took the Nook off Android right now and put it on Windows, they could potentially lose market share. Hopefully Microsoft is not that dumb," said one hedge fund analyst, who declined to be named. The analyst believes that Microsoft may eventually change the NOOK over to Windows, but probably not before Christmas 2013, given the lead time in development.

This may give an added boost to the excitement of Windows 8 as a viable mobile platform. Investors have bid up Microsoft shares 23.2% year-to-date, thanks in large part to the excitement of Windows 8, due later this year.

Amazon: Loser

This announcement may be a bit of a blow to Amazon , as it provides a definitive third player in the tablet space, at the same price point as the Kindle Fire.

Apple's iPad competes at a different price point, starting at $499, yet offers a much different feature set. The NOOK and the Kindle Fire are both priced at $199 and offer roughly the same feature sets, including 7-inch screens, and significant access to content, such as books, DVDs and magazines.

"I think the joint venture it might wear on Amazon's Kindle sales over time, especially if Microsoft can execute a retail strategy. However, I don't think Amazon's sales are gonna fall off in the next two quarters," said Sozzi in a phone interview.

There have always been concerns about Amazon's margins for the Kindle Fire at the $199 price point. It's generally believed that Amazon sells the product at breakeven or a loss, though the online retail giant has not confirmed the cost of making the tablet, nor how many it sells. A strong partnership between Microsoft and Barnes & Noble may lead to a price war, which would further pressure Amazon's razor-thin margins.

Interested in more on Barnes & Noble? See TheStreet Ratings' report card for this stock.

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--Written by Chris Ciaccia in New York

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