The Enemy of My Enemy Is My Friend

In the competitive battles in mobile, the announcement that Microsoft would take a stake in Barnes & Noble — specifically, the Nook e-reader and tablet decision — must have sounded strange. After all, the Nook doesn’t run Windows. Microsoft had sued B&N for alleged patent infringement. The book retailer was one of the few holdouts, as many companies that sell devices using Android, including giants like Samsung, buckled under the prospect of facing down a company that has obtained more than 20,000 patents and could easily fund a drawn-out court battle.

And yet, when you look at the situation more closely, you see something like a case study in a business administration degree class. Both companies are using an important strategic tool: building alliances with others to cause bigger problems for a mutual competitor. Microsoft’s problems with B&N started with Google and Android. The search giant created what has become a wildly popular software platform that directly competed with mobile versions of Windows. Even worse, it gave the software away, banking on making money from advertising to provide ROI. Microsoft’s market share in mobile shrank to an afterthought.

Add to that the trouble that Apple has made for Microsoft with the iPad, taking away potential customers for tablets that will eventually run the upcoming Windows 8. Microsoft looked to other ways to hinder its competitor as it tried to get the Windows Phone to a point where it could become more popular on other devices. One major tool was IP (intellectual property) used as an offensive weapon. Microsoft looked through its deep patent portfolio and started filing suit. One company after another gave in and started to pay an estimated $5 or more for each unit that it shipped. Meanwhile, B&N had its own difficulties. E-books were pushing out traditional paper ones and Amazon had taken an enormous lead in the area. Not only did it sell electronic titles, but CEO Jeff Bezos had pushed ahead on the Kindle family of products.

Now Amazon had a range of options and price points to draw in consumers with low e-book prices and then use the proprietary hardware hold on them. Once someone began to buy Amazon e-books, it became less likely that B&N could recapture the person as a customer. Barnes & Noble created its own series of tablets and readers using Android. However, it was trying to play catch-up with both Amazon and Apple, the king of the tablet, while being on far less steady financial grounds.

That put it on Microsoft’s competitive legal radar, which meant legal bills that would only further pressure the company economically. The two could have continued fighting, but both realized that cooperation could offer far more. Microsoft invested $300 million into the Nook division of B&N. A waste of money? There’s a good chance it wasn’t, as Microsoft has often been smart in such investments. (It got 1.2 percent of Facebook for $240 million, which is now worth close to $1 billion, even with the drop in stock price.)

Barnes & Noble gets the financial help it needs, plus some deep technical expertise that should come in handy. Microsoft sees a continued possibility of attacking its major rivals. It’s a smart move on both their parts.