Microsoft Banking on Barnes & Noble eBook Business

Microsoft believes in the profit potential of eBooks.

To shore up its faith, the tech giant is backing Barnes & Noble in a new partnership confirmed Monday. And it’s going to cost Microsoft a pretty penny.

This morning, Barnes & Noble and Microsoft announced the formation of a strategic partnership in a new Barnes & Noble subsidiary, which – according to the formal announcement – “will build upon the history of strong innovation in digital reading technologies from both companies.”

The partnership will accelerate the transition to e-reading, which is revolutionizing the way people consume, create, share and enjoy digital content.

The new subsidiary, for now, is simply being referred to as “Newco.” A firm name is yet to be decided.

Microsoft will make a $300 million investment in Newco at a post-money valuation of $1.7 billion in exchange for an approximately 17.6% equity stake.

Barnes & Noble will own approximately 82.4% of the new subsidiary.

“The formation of Newco and our relationship with Microsoft are important parts of our strategy to capitalize on the rapid growth of the NOOK business, and to solidify our position as a leader in the exploding market for digital content in the consumer and education segments,” said William Lynch, CEO of Barnes & Noble. “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.”