Microsoft Tries to Derail the Barnes & Noble Juggernaut (!?)

In the legal morass that is Android comes the latest news that Microsoft is suing Barnes & Noble, alleging patent infringement.  Think about the surface absurdity of that one.  Microsoft suing Barnes & Noble.  Even The Onion hasn’t contemplated this scenario.  So, what’s really going on here.

At a macro level, here’s what’s happening:

  • These kinds of patent lawsuits are so common that I’ve almost stopped looking at them altogether.  Usually it goes like this:
    • Someone sues someone else.
    • The someone else counter-sues.
    • The two companies exchange patent cross-licensing agreements, usually with one side or the other having to kick in some cash.
  • There’s a slight twist to the whole Android scenario, again though one that’s not uncommon.  Most of these patent lawsuits have focused on Android licensees and not the deep-pocketed Google.  It only makes sense to go after the weaker players, albeit ones with sufficient funds to pony up.

What are all these people suing in the Android space trying to accomplish?  It’s real simple.  If you’re trying to sell an operating system into a market where Google is giving it away, you need to make the OS appear not to be free.  In other words, you may not pay for the OS but by the time you factor in legal costs, your free OS all of a sudden isn’t so free.  Somewhere along the line, Google is probably going to have to ante up to help its partners by resolving all of these patent infringement issues.  It probably means Google’s going to have to write a check.  The good news:  they’ve got $34.9 billion in cash on hand and are printing more each quarter.  So much for the chilling effect on Android licensees.

What’s particularly interesting about the Microsoft/Barnes & Noble case is that presages interesting competition in the tablet marketplace.  Why should anyone be worried about Barnes & Noble or, by extension, Amazon?  The Barnes & Noble Nook e-reader actually runs on Android.  In effect, they’re selling a specialized Android tablet for $249.  How can they do that when the rest of the Android tablet marketplace is horribly overpriced as I’ve recently blogged?  Welcome to the new world of ecosystems and razors and razor blades.  Amazon and Barnes & Noble can sell these devices at low (or no) margin because the economics of incremental margin on the razor blades (books and other digital content) is so compelling and predictable that it pays to seed the market with devices.  That’s another reason why Apple, asides from supply chain efficiencies, can sell the iPad so competitively.  It can count on a reasonable income stream from the AppStore while in the Android space, those margins go to Google.

Yes, I know that the Nook and the Kindle are not general-purpose tablets.  Today.  But the color Nook is pretty darn close.  The Wall Street Journal’s Brett Arends even recently told readers how to turn their Nooks into tablets.  He overstated his case to make a point:  Barnes & Noble can do this easily and likely will.  If not, they deserve to follow Borders into bankruptcy.

Netting it out:

  • Google is likely to have to share some of its profits with its ecosystem to cover legal exposures.
  • Google is likely to have to share some of its app store revenues with partners.  Otherwise, the situation with competing app stores (already a fracturing standard) is going to get (much) worse rather than better.  They need to do this one quickly.
  • In other words, Android tablets need to get cheaper and Google will have to share its app and advertising revenues to make that happen.
  • Players like Barnes & Noble and Amazon can become strong players in the tablet marketplace because they have the economic model and ecosystem to compete with Apple.  Selling hardware alone is not much fun these days, and is only going to get worse.
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