"Microsoft's Nook deal pits it against Amazon and Apple"

To tackle the dominance of Apple and Amazon, Microsoft needs allies, writes Shane Richmond. Hence its investment in US bookseller Barnes & Noble's Nook business.

The Barnes & Noble Nook ereader 

Though it was launched in 2009, many Britons might not have heard of Barnes & Noble's Nook ereader until this week when Microsoft invested $300 million for a 17.6 per cent stake in the business.

Like the Kindle, which Amazon launched two years earlier, the Nook was mostly based on an e-paper screen but the US bookseller added the twist of a thin LCD screen at the bottom of the device to display colour book covers.

A full-colour device, the Nook Color, followed in 2010 and in June last year Barnes & Noble launched the touchscreen Nook Simple Touch. In November 2011, the Nook Tablet was released to compete with Amazon's Kindle Fire.

Microsoft's investment values the Nook business at $1.7 billion - more than the parent company itself - and hints at big plans for both companies.

"It's a cyclone of converging storylines," said James McQuivey, an analyst with Forrester. He said that with Apple and Amazon "dominating in their respective domains" companies like Microsoft and Barnes and Noble are having to combine their strengths to compete.

"They're going to make a device out of this company. I see a tablet here," said Mr McQuivey. He said he expects Microsoft to build the Nook service into a 10-inch tablet which would sell for around $400 - the same price as Apple's entry-level iPad.

Microsoft is due to release Windows 8 in October. The new version of its computer operating system incorporates the tile-based Metro interface from Windows Phone 7, Microsoft's smartphone operating system.

While Windows is still the dominant operating system for desktops and laptops, Microsoft has been left behind in the tablet market, which is dominated by Apple, with Google's Android operating system providing most of the competition.

"They're going to want to find more reasons for people to buy Windows tablets," said Richard Broughton, senior principle analyst at IHS Screen Digest. The Nook deal made sense, Mr Broughton said, because "ebooks are perhaps the fastest growing form of digital content".

He added that Microsoft would still face a challenge to establish itself as an ebook retailer in Britain because the Nook brand was unknown. He said: "If you look at the way Kobo has approached the market - in every country they launch in, they partner with a major retailer."

Mr McQuivey said that Barnes & Noble was at a disadvantage against Amazon, which dominates the ebook market in Britain and the US, because it did not offer the range of products that would bring people back to its website every day.

Amazon, he said, is "an attention-getter that nobody other than Google or Facebook can match".

Of course, Nook could just be one piece of the puzzle. Don't be surprised if Microsoft lines up more deals before October.