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Thanks to Amazon's dominance, it's easy to forget that traditional bookseller Barnes & Noble (B&N) has managed to build a decent digital portfolio of its own.

In the past, that has sparked speculation that B&N would eventually spin off its NOOK division, freeing its digital business from the baggage of its brick-and-mortar business.

Today, B&N announced that it is effectively doing just that, but not in the way one might have expected. To take NOOK to the next level, B&N has formed a new subsidiary which will include its NOOK Digital division as well as its College Businesses.

The kicker: software Microsoft will invest $300m in the new subsidiary for a 17.6% equity stake in the venture, giving the new company a post-money valuation of $1.7bn.

According to Microsoft President Andy Lees, teaming up with B&N makes sense. "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."

William Lynch, B&N's CEO, also sees logic in the relationship. "The formation of [the new subsidiary] 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," he stated in a press release.

In helping B&N spin off its digital business, Microsoft is obviously hoping to make Windows a bigger part of the exploding e-book/e-reader market. For B&N, a Microsoft marriage kills two birds: its allows it to launch a new digital subsidiary without going to the public markets for capital and it gives B&N the ability to end ongoing patent litigation with Microsoft.

The latter might be the most interesting angle of the deal. B&N, which created a custom version of the Android OS to power its NOOK Color and NOOK Tablet tablet devices, had been involved in a bitter lawsuit against Microsoft over patents that Microsoft says implicate Android devices. At one point in the dispute, B&N called for the US Department of Justice to investigate Microsoft's tactics.

Needless to say, it's hard to believe that the patent issue didn't play a role in the matchmaking here, and with Microsoft willing to provide a license and put $300m on the table, B&N may have decided to follow the adage, if you can't beat 'em, join 'em.

Patricio Robles

Published 30 April, 2012 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

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