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With Nook Deal, a Hint of Microsoft Hardware

Brian Snyder/Reuters

Microsoft does not make its own hardware products, except, of course, in the rare cases when it does, like the Xbox videogame console, the Zune music player and computer mice. In the PC and phone markets, though, Microsoft has been extraordinarily careful to say it wants to create only the software that powers those devices, leaving the hardware to outside partners.

But the company’s decision to invest in the Nook e-book business of the struggling retailer Barnes Noble offers some tantalizing clues that Microsoft may be rethinking its position on hardware.

First, there is the Microsoft investment itself in the new Barnes Noble e-book subsidiary: $300 million for a 17.6 percent stake, plus an additional $305 million in payments over five years. There is speculation that Barnes Noble, as a result of this investment, will create new Nook devices that are based on Windows 8, a coming operating system designed for devices with touch-sensitive screens.

Neither party is confirming those plans. If a Windows-based Nook does come to pass, it will put Microsoft in a delicate position with all the other companies making Windows 8 devices who have not been blessed with a Microsoft investment. Will Microsoft favor Windows Nook devices in some way because of its investment, perhaps by getting more deeply involved in the integration of hardware, software and services?

James McQuivey, an analyst at Forrester Research, said Microsoft needs to avoid showing favoritism toward any one hardware partner or the rest of them “will revolt.” There are plenty of people who think Microsoft, like Apple, should consider making its own hardware to have more control over the total package that consumers buy.

But if a Windows Nook device comes out of the partnership, Mr. McQuivey points out that Microsoft still would not be making the Nook itself. Barnes Noble designs but does not technically make the Nook, either, outsourcing its manufacturing to Foxconn, just as Apple does with the iPhone and iPad.

The details of the deal, though, suggest that Microsoft is contemplating the possibility of going further and creating its own e-book reader. Deep within a filing Barnes Noble made on Monday with securities regulators is a section titled “Microsoft Reader.”

The section says Microsoft has the option to include in any reader it chooses to make an online store run by the new Barnes Noble e-book subsidiary  — known, for now, as NewCo until the parties figure out something better to call it. “If Microsoft creates a reader, Microsoft may include an interface to the NewCo Store in that reader and may surface in that reader all Content purchased by customers from the NewCo Store,” the filing states.

The rest of the filing doesn’t say whether this reader would be a Microsoft device or reader software that runs on another company’s device. I’ve asked Microsoft to clarify what its plans are and will update this post with a comment from the company if it chooses to do so.

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