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

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.

Who’s in the middle of all of it? If you guessed president-without-portfolio Lees, you’d be right. In a Microsoft statement, Lees said, “the shift to digital is putting the world’s libraries and newsstands in the palm of every person’s hand, and is the beginning of a journey that will impact how people read, interact with, and enjoy new forms of content. Our complementary assets will accelerate e-reading innovation across a broad range of Windows devices, enabling people to not just read stories, but to be part of them. We’re at the cusp of a revolution in reading.”

The Associated Press says that B&N CEO William Lynch “declined to say whether it was Barnes & Noble or Microsoft that initiated the discussions, but he said the talks had been going on since before the beginning of the year.” AP then quotes Lees as saying, “We have been circling the relationship for quite a long time… When you think of different types of reading and what’s going to happen when that goes digital, it’s really quite dramatic to be bringing that to Windows customers.”

Er, “to Windows customers”?

Too bad 90 percent of the people who buy a Nook couldn’t care less if it’s built on Android. Hard to imagine they’d care if it were built on Windows RT.

Where does that leave us in the ongoing Microsoft Executive Suite shuffle? To my jaundiced eye, it puts one Microsoft veteran in charge of Nokia, another Microsoft veteran in charge of the Wookie. Smartphones, check. Tablets, check. Myerson is working for Sinofsky even if the org chart doesn’t say so.

Windows 8, Windows RT, Windows Phone 8 “Apollo” are all coming around October, and Office 15 will be widely available in beta (er, Consumer Preview) by then, too, with a shipping version late this year or early next year. The product roads are converging.

Looks to me like everything’s set for a transition from Ballmer to Sinofsky — over the span of many years, of course — to commence in early 2013, as I predicted almost a year ago.

This story, “The real story behind the big Microsoft and B&N deal,” was originally published at InfoWorld.com. Get the first word on what the important tech news really means with the InfoWorld Tech Watch blog. For the latest developments in business technology news, follow InfoWorld.com on Twitter.