Archive for April, 2012

YouTube co-founder Chad Hurley talks Delicious, acquisitions and his push into China

You may have encountered Chad Hurley‘s work before and not even realized it. Way back in 2005, he founded what would become the world’s preeminent video streaming and hosting site, YouTube. It exchanged hands for more than $1bn in 2006 to become a fully-fledged Google product.

Hurley then went on to found Avos Systems, which acquired Delicious from Yahoo back in April 2011, with Hurley becoming its CEO. Oh, and he also used to work at PayPal, where he’s credited as designing the eBay-owned money platform’s logo. Not bad for a man of 34.

It was this illustrious past which led The Next Web to interview Hurley earlier this month, and subsequently invite him onto the stage at the TNW conference in Amsterdam last week. Here, our very own Robin Wauters prodded the tech entrepreneur on what he’s been up to of late, where he announced a round of funding for Avos and discussed his push into China with Mei.fm (check previous coverage here), and the ultra-secret Zeen, which lets you discover and create beautiful magazines.

Take it away, Chad…and remember, you can catch up on all our conference highlights right here.

What’s Next For Mobile Tech In The US

mobile-120wide-1.png Hear from Bravo, 1-800-Flowers, the NHL and other brands at the Mobile Advertising conference on June 14, 2012 in New York. From branded apps to geo-targeting, from mobile video to iPad–find out the most successful strategies at Mobile Advertising!

DNUI spent last week in Tokyo visiting our colleagues at SoftBank Corp. and Yahoo! Japan, including its new executive team.

For decades, Japan’s advanced infrastructure and consumer technology has been a harbinger of what’s to come in the US. Our investment thesis at SoftBank Capital, including our current focus on the mobile web, has been driven by these dynamics.

Below are some observations from my recent trip.

Mobile Payments

Mobile payments have been prevalent in Japan for many years, driven by Sony’s FeliCa RFID smart card system.  NFC adoption is looming, but the broad installation of FeliCa readers will require dual functionality for some time.

FeliCa technology is used with phones and contactless cards, including the popular Suica system.  It was first accepted for public transportation, which then drove adoption by many taxis, vending machines, convenience stores, and restaurants. 

The technology was originally embedded in Japanese feature phones, or ketai.  Since the iPhone does not include FeliCa, many users maintain a second handset just for mobile payments.  The new CMO (that’s Chief Mobile Officer) of Yahoo! Japan actually hacked a FeliCa chip into his iPhone case.

Public transportation in Japan solved the adoption hurdle and led to a proliferation of payment readers at point of sale.  Without the same level of public transport use domestically, the US is likely to need billions of dollars in incentives from large corporations to get mobile payments off the ground. 

Mobile Apps

US-built applications are quite popular in Japan, as app stores have facilitated access to the Japanese consumer. Shibuya and Shinjuku train stations in Tokyo are the 2nd and 3rd most checked-in stations globally on Foursquare.  Late in the evening in Japan when the US sleeps, photos trending on Instagram and songs trending on Soundtracking are often from Asian users.

The most dominant Japanese built applications are typically developed by larger corporations or startups from countries like Korea.  However, competition is emerging from a nascent startup community in Tokyo, where a number of accelerators have popped up.  Despite advanced infrastructure and hardware, Japan has been less innovative globally on the software front.  The emerging startup community is being fueled by new angels from tech companies like SoftBank, Yahoo! Japan, GREE and DeNA.  These startups, many of which are mobile-centric, are targeting not just Japan but the broader web community. 

Accessories Appcessories

I visited multiple SoftBank stores, which have the feel of an Apple Store with the added charm of SoftBank’s corporate mascot Otousan, an adorable white dog.  Featured products at all stores included the iPhone and iPad, which SoftBank first distributed in Japan, many Android devices, and WiFi services including the world’s leading 4G offering at 76Mbps down and 10 Mbps up.  On top of these core products, the array of items available to enhance your smartphone aesthetically and functionally is an early adopter’s dream. 

Device accessories are abundantly available in Tokyo.  Displays of device cases seemed endless at stores in the famous Akihabara electronics district.  SoftBank stores sell hand-carved wood iPhone cases for as much as $300.  Japan’s trendy Harajuku girls accessorize their colorful outfits with trinkets that attach to phone covers or plug into audio jacks.

Appcessories, devices and accessories designed to work seamlessly with smartphone apps, are prevalent as well.  A few favorites were Omron’s Wellness Link pedometer and Bandai’s SmartPet, which turns your iPhone into an interactive pet.  The Pogoplug, built by our San Francisco-based portfolio company, was one of the domestic products on prominent display.

Virtual Social Networks

The vast majority of Japanese social networkers do not use their real names. Virtual personas are developed with the help of avatars and other digital representations of a user’s desired identity.  Homegrown social network Mixi and mobile gaming platforms GREE and DeNA were built with this social structure.

Twitter has emerged as the leading social network, with around 30 million registered accounts.  While most users still use a pseudonym, sites that revealed the Twitter handles of celebrities helped drive massive adoption.  The most followed Twitter user living in Japan is SoftBank Corp. Founder and CEO Masayoshi Son, with over 1.6 million followers via @masason.

Despite Twitter’s current dominance, many Japanese consumers expect Facebook to become their leading social network in the next year.  Facebook accounts in the country recently surpassed 10 million, which is double what they were six months ago.  Multiple users claimed the growth has been driven not by college students but businesspeople, who are using Facebook in the way US consumers use LinkedIn, real identities included.

We’re seeing the inverse in the US, where a number of social experiences on the phone, like our portfolio companies Mocospace, Piictu, and Thumb, are helping users make new connections via fake or embellished digital personas.  Second Life should have catered to this behavioral demand, but perhaps it took the required simplicity of mobile to yield a more broadly adopted social experience.

If it looks like a bubble and it feels like a bubble . . .

The debate over whether we are in a technology bubble — and if so, what kind of bubble it might be — flared up again over the weekend, sparked by a piece in the New York Times that said venture-capital investors are encouraging startups to forego revenue so they can fetch higher valuations. Others immediately took issue with this idea, however, saying there is no bubble and repeated attempts to find one are just an attempt to stir up controversy. So which is it? That depends a lot on what you mean by the term “bubble.” Does it mean the kind of investment mania that resulted in a public-market bloodbath a decade ago, or just any sign of overvaluation?

Bits writer Nick Bilton says in his NYT piece that venture investors are all busy denying there is a bubble, despite the mounting evidence to the contrary, because they have an obvious vested interest in perpetuating a hype-filled investment atmosphere:

Acknowledging any possibility that tech companies aren’t worth what you say they are worth would be followed by the sound of a giant pop, and the money and investments would dry up. The machine could grind to a halt.

In fact, says Bilton, venture capitalists are busy inflating the bubble as quickly as they can by telling the companies they invest in to avoid making money as long as possible. Why would they do this? So that valuing the enterprise is as difficult as possible and investors can then propose all kinds of inflated numbers, something financial analyst and venture investor Paul Kedrosky calls “mark-to-mystery” financing. “As long as there are no numbers, I can have whatever mark I want for an external valuation,” he says.

Is this just 1999 all over again?

Bilton also quotes Jeffrey Pfeffer, a professor at Stanford’s Graduate School of Business, as saying what we are seeing in Silicon Valley right now is “1999 all over again — but this time, it’s gotten worse.” The professor adds that companies are “throwing around funny money” and that the “economic values don’t add up.” Technology veteran Dave Winer also says he believes the market is fundamentally bubble-oriented at the moment.

It’s not clear what Pfeffer is referring to exactly, but it’s not a stretch to that he’s probably talking about deals like Facebook’s $1 billion purchase of Instagram, which sent shock waves through the startup scene. But is that the sign of an impending bubble? It might be if you assume that Facebook itself is overvalued and therefore was able to pay a ridiculous sum of money for a small startup. The most obvious sign of whether Facebook is overvalued or not, of course, will come when the company starts publicly trading and investors of all kinds get to weigh in on what they think of its future prospects.

Venture investors like Dave McClure of 500 Startups argue that Pfeffer is mistaken and there are no signs of a 1999-style bubble in technology.

If public stocks aren’t overvalued, is there a bubble?

And McClure is right in a sense: The kind of mania the tech sector witnessed in the late 1990s, with unprofitable and even revenue-less startups going public at massively inflated valuations, has yet to manifest itself in today’s markets. You could argue that Zynga, Groupon and other companies are overvalued, but they have suffered share-price declines that show a substantial amount of skepticism — the kind of skepticism that was in short supply in the late 1990s. Apart from Facebook, there are few signs of any kind of mania for public technology stocks.

StockTwits co-founder and venture investor Howard Lindzon (see disclosure below) says the only bubble that exists is in the oversupply of what he calls “wantrepreneurs” — people who are chasing the pot of gold at the end of the startup rainbow. That kind of impulse has likely been accelerated by stories like Instagram’s but also by the ease with which startups can be built and grown in today’s digital world, thanks in part to “crowdfunding” platforms like Kickstarter and the availability of cheap computing services in the cloud, which have dramatically lowered the barriers to entry.

Even if there is a lack of public-stock mania, however, that’s not to say there aren’t still risks. If the flow of investment money at the angel and seed-stage level gets too large, it can inflate bubbles that can in turn help produce bubbles further down the spectrum. And if that pressure overflows into the public markets, it could start to look a lot more like the 1990s fairly quickly. But for the moment, whatever financing pressure there is seems to be concentrated at the smaller end of the market.

Bubbles, yes — but not a capital “B” bubble

This is the conclusion that angel investor and entrepreneur Chris Dixon comes to in a smart post on the topic, in which he looks at the different elements of the bubble case. Public stock prices don’t really look overvalued at all, Dixon says, and one-off deals like the Facebook purchase of Instagram aren’t compelling evidence either. And while there are signs of inflated valuations in certain parts of the ecosystem such as the seed stage, he says — driven by people trying to find the next Facebook — there are signs of undervaluation in other parts, including at the Series A level.

One of the parts in the New York Times story that got the most reaction from venture investors — apart from just the general suggestion that they are inflating a bubble — was the accusation that “[M]ost venture capitalists . . . are not interested in building viable long-term businesses. Rather, they’re interested in pumping up enough hype and valuation to find a quick exit through an acquisition at an eye-popping premium.” Some critics said this is true by definition, since venture investors are interested primarily in short-term returns. But Dixon argues that even if it is true, smart investors don’t take that approach:

No good venture investors invest in companies with the primary strategy being to flip them. This isn’t because they are altruistic — it is because it is a bad strategy. You are much better off investing in companies that have a good chance to build a big business. This creates many more options including the option to sell the company. Acquisitions depend heavily on the whims of acquirers and no good venture investors bet on that.

So while some venture funds may be doing their best to inflate expectations and cash in on high valuations, that appears to be causing problems only at the small end of the startup pool — for now. Without any obvious signs of a public-stock mania that puts individual shareholders at risk, it’s hard to argue that we are in a 1990s-style bubble yet (although some critics fear that the new crowdfunding bill could accelerate the problem). Whether Facebook’s IPO triggers a broader inflationary atmosphere remains to be seen.

Disclosure: StockTwits is backed by True Ventures, a venture capital firm that is an investor in the parent company of this blog, Giga Omni Media. Om Malik, the founder of Giga Omni Media, is also a venture partner at True.

Post and thumbnail images courtesy of Flickr users Photo Clinique and Bill S

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Australian Price Gouging Inquiry Targets Apple, Microsoft And Others

Apple Retail Store - Sydney

Getting a new laptop or buying a new license for an operating system is often cheaper in the U.S. than in most other countries. Europeans, for example, are used to paying a hefty premium for Apple products and the situation is similar in Australia, where the cheapest MacBook Air currently costs about 15% more than in the United States. Now, however, the Australian government is starting a parliamentary inquiry into these pricing schemes. According to Australia’s Sydney Morning Herald, the politicians behind this inquiry hope that calling these companies out publicly will result in prices dropping.

The final details of this inquiry are still being finalized, says the Sydney Morning Herald, but the committee that will oversee the proceedings plans to invite “all the big computer and software companies including Apple and Microsoft.” The committee will also look at the price differences in eBooks and games in different markets.

Ed Husic, a member of the Australian Parliament and a member of the committee that has been asking for this investigation for the last year or so, argues that “small to medium-sized businesses might pay over $10,000 more on software compared to overseas counterparts.”

The standard argument for higher prices in these markets is that local taxes and the cost of setting up overseas operations increase cost, which are then passed on to local consumers. According to a report by Australia’s Productivity Commission, however, “these excuses, in most cases are not persuasive, especially in the case of downloaded music, software and videos, for example, where the costs of delivery to the customer are practically zero and uniform around the world.”

[Image credit: Sydney Morning Herald]

Suffer: Rise of text spam creates ugly dilemma for mobile users

The number of junk text messages in the U.S. reportedly rose to 4.5 billion last year. This can create a nasty choice for consumers — pay to be spammed or pay protection money to a carrier.

For anyone out there lucky enough not to have received one, spam texts are unwanted ads or scam promotions sent directly to your cell phone. It feels as intrusive as a stranger in your bathroom. Bloomberg reports that the volume of these messages soared 45 percent last year.

The problem is not the just invasive nature of the text but that many users also face the indignity of paying for those intrusions. Unless a user has an unlimited texting plan, she may have to pay 20 cents for every inane, unwanted text message that hits her cell phone.

And therein lies the rub. Today, free messaging services like Kik or WhatsApp mean many users may not want to pay for a text plan at all. But the requirement to pay for incoming messages means that people may feel compelled to buy the carrier plans as a form of spam insurance. Worse, the phone carriers have jacked texting plans from $5 to $20 — all this for tiny bits of data that cost virtually nothing to transport.

The Federal Trade Commission is trying to get on top of the problem and, according to Bloomberg, has prosecuted a handful of spam senders. But ironically, it’s legitimate companies like Timberland and Jiffy Lube who have paid the most in penalties — these companies are easy prey for class action lawyers who wait for them to bungle a marketing campaign and then sue for millions under the Telemarketing and Telephone Consumer Protection Act (TCPA). Companies like Twilio that offer “club-texting” services are also facing class actions.

Meanwhile, Bloomberg reports the wireless industry is looking into acquiring anti-spam services like San Francisco based Cloudmark. The industry is also grousing about the costs of investigating consumer spam complaints.

The text spam problem is real but consumers should not be in the position of paying for these privacy invasions. The FCC should force the carriers to cease charging for incoming messages until the spam menace is solved.

The reported 4.5 billion text spam messages were among the 2.3 trillion sent overall last year.

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Why Instagram Images Will Take on a Sense of Permanence

Instead of lashing out or trying to fight back against the ever-expanding world of mobile photo-sharing apps, Flickr has decided to jump on board. It has happily donned Instagram’s rose-colored glasses or, rather, filters.


The announcement that Facebook has acquired Instagram underscores the incredible growth and influence of the mobile photo-sharing ecosystem,” says Flickr’s Kay Kremerskothen. “This growth is highly beneficial to Flickr, with mobile apps such as Instagram, Hipstamatic and more making up a large percentage of the images uploaded to Flickr every day.”

Sharing an Instagram image to Flickr changes it from a spur-of-the-moment snapshot into something that feels more formal and permanent. On Instagram, an image is a one-size-fits-all look at users’ fleeting moments. On Flickr, though, it is now living in a space that’s particular to documentation, clearer copyrights (everything on Instagram is public) and the possibility for multiple sizes. Flickr acts more as a repository for a wider range of images. 

Will Instagrams Move from Facebook to Flickr?

If for some reason Instagrammers want a more permanent, searchable home for their images after Facebook’s acquisition, they will take the time to download those images from Facebook and up onto Flickr. This is because right now on Facebook, it’s difficult and clunky to locate past images.

Facebook organizes photos by album – to find a photo, one must click through the albums or scroll through the entire “photos and videos of you” section, which is organized by year. It’s nifty if you’re thinking about time chronologically – but how many users are? While the photo section gives you a nice overview of your “Facebook life,” it’s not exactly an easily searchable, metadata-rich space. This is where Flickr, especially the new HTML5 photo uploader, could come in handy.

Yet do Instagram users really want to create a searchable database of their images? If they do, and they are willing to use Flickr for these purposes, Flickr could become a repository for images that Instagram and iPhoneography users want to make more permanent and searchable. That is, if they actually care to document their memories.

If these users prefer to live in the moment, well, let the ultrasounds and kid photos on Facebook keep coming.

Soon they will be cloaked in Earlybird, Sierra, Lo-fi and 1977 Instagram filters


Images via Flickr.

Marketplace For Customized Goods CustomMade Raises $4M From Google Ventures And Others

screen-shot-2011-11-17-at-6-56-28-pm1

CustomMade , an online marketplace that connects shoppers with artisans to make customized goods, has raised $4 million in funding co-led by Google Ventures and Schooner Capital. Existing investors Launch Capital, Nextview Ventures, Andrew McCollum and First Round Capital all participated in the round. This brings CustomMade’s total funding to $8 million.

CustomMade allows customers who want to make custom products like jewelry and furniture post project proposals. The startup has built a community of makers that can browse through customer project requests and assign themselves to ones they are suited to. Makers can sign up for and build profiles on the site, which allows customers to browse through their portfolios.

Currently, the site has over 3,000 artisans and are seeing $500,000 worth of project requests per week. An average project receives three bids and is completed for $1,000. And transaction volume is growing at 50 percent each month.

The site aims to differentiate itself from artisan marketplace for homemade goods, Etsy, by focusing exclusively on items that have are customized or personalized. For example, you could have a piece of jewelry replicated, or a piece of furniture custom designed and created. And CustomMade’s price point is higher than Etsy.

Co-founder Seth Rosen explains that the site been around since 1996, but he and co-founder Mike Salguero bought CustomMade in 2009, and for the first two years, focused on adding high-quality makers and artisans to the platform.

“CustomMade as a platform is creating a fundamentally different retail paradigm,” said Google Ventures partner Rich Miner. “The model of giving consumers the ability to access, select and create custom work as an affordable and fun alternative to shopping at a retail store is a large opportunity and one that we are excited about as we continue to work with CustomMade.”

The new funding will be used to expand the site’s technology infrastructure.


  • CUSTOMMADE.COM

CustomMade is a marketplace for the world’s professional craftsmen and creators. Here, you can custom make or customize anything you are looking for – from a unique bed to a one-of-a-kind wedding ring. Browse, discover, and request anything you might want custom made. Need something built on demand or simply want something unique? Connect with our craftsmen, describe your ideas, and bring your creation to life. Get exactly what you want, the way you…

Learn more

UK TV-buyers apparently not so smart as 53% can’t identify Internet capabilities

According to a survey out today from YouGov, people in Britain are not quite ready for connected TV viewing. The research shows that 50% of the UK residents polled are mostly buying new televisions for a more up-to-date model rather than thinking about connecting it to the Internet.

96% of SmartTV owners said that the picture quality was the most important feature followed by 93% focussing on screen size and 89% looking for better sound quality.

Slightly more worrying, only half of the respondents (53%) correctly identified a SmartTV as a set that directly connects to the Internet without requiring another device and one in four SmartTV owners have never used it to connect at all.

Quite why consumers are not taking advantage of this neat new technology could be related to a number of factors, lack of awareness or instruction or even traditional user habits. These results appear to point to the idea that television is still a passive medium that does not require interaction from viewers, let alone being a portal to an in Internet experience.

Getting the smart part

Dan Brilot, YouGov’s Media Consulting Director says that the adoption of SmartTVs, is similar to other domestic media gadgets.

“The ‘smart’ part of a Smart TV is not yet the main reason people are buying them; it’s more about future-proofing their TV set in the same way that lots of people bought HD TVs even before HD channels were available. I think many early adopters of Smart TV are buying them for the sake of owning the latest gadget. We see the profile (in terms of tech adoption) as very similar between iPad and Smart TV owners at the moment. These are the kind of people who are willing to make a big ticket purchase without quite realising what they’ve bought.”

Brilot also notes that there might be some confusion when technologies are presented all together and there is not enough in the way of  description for the possible opportunities for a device.

“You wouldn’t imagine that a quarter of people on any other Internet-led device hadn’t used it to go online – especially at this stage of the adoption curve. Manufacturers need to understand what the USP of a Smart TV is, either understanding a current need or creating one – as Apple do so well – rather than bundling together different technologies without the necessary thought as to how they might be used together.”

Battle of the brands

According to the research, Sony could be overtaken very soon by Samsung as the consumer choice for SmartTVs. Among existing owners, 36% have a Sony, 33% have a Sony and Panasonic trails behind with 16% of the market. That said, almost two thirds of people planning to buy a SmartTV in the next 12 months are considering a Samsung, followed by Sony at 48% and Panasonic at 40%.

Apple is already making an impact on the market without even launching a smartTV. Over a quarter of respondents in this survey say they plan to buy an Apple TV. It’s no bad thing when consumers are hoping to buy an item that doesn’t yet exist.

Brilot says that getting a high profile campaign to create awareness in the smartTV arena is helping Samsung take a big bite out of the market.

“Sony is seen as the quality or premium brand favoured by the early tech adopters – late twenty- or thirty-something men – but Samsung is the brand working the hardest and most successfully to bring Smart TV to the masses through its advertising campaigns as well as leading the way in the availability of apps on the sets.

Although nine in ten Smart TV owners are satisfied with them, one thing all manufacturers need to focus on is the user interface. This feature has the biggest disparity between importance and performance.”

YouGov’s research says that 14% of UK households are set to own a SmartTV in the next year which is bound to see a change in viewer habits.

Already through the use of video-on-demand services like Channel 4′s 4oD on Youtube or the BBC’s iPlayer, audiences are prepared for watching programs as and when they like rather than being constrained by linear schedules.

A large portion of the younger market for SmartTVs is already adopting non-linear viewing. 53% of 18-24 year olds with a SmartTV say the majority of programmming they watch is ‘on-demand’ and parents with pre-school children also seem to be taking advantage of the flexibility of watching what they want, when they want.

Considering Brilot’s observation on user experience, it seems that manufacturers will have no problem getting their TV sets into homes, but they really need to work on making the internet experience more appealing and simple to use if they are to offer the best possible service to consumers.

As viewers already seem comfortable with two-screen viewing with a tablet or mobile device to enhance a viewing experience, it should not be such a push to encourage them to take up the added features on a connected TV.

Microsoft partners with Barnes & Noble in $300 million e-reading investment

In a surprise announcement, Microsoft has partnered with major bookseller Barnes Noble, forming a new venture that will operate to “accelerate the transition to e-reading, which is revolutionizing the way people consume, create, share and enjoy digital content.”

Barnes Noble has formed a new subsidiary, of which it will own 82.4%, pushing e-reading technologies and helping consumers and publishers with their digital offerings.

As part of the deal, Microsoft has invested $300 million into ‘Newco’, a temporary name for the company that Barnes Noble has yet to agree. Its 17.6% equity stake comes at a post-money valuation of $1.7 billion.

It appears that the new partnership is a way for Microsoft and Barnes Noble to avoid costly legal fights, as they have bothed dropped patent suits against one another. Instead, Barnes Noble the new subsidiary will have a royalty-bearing license on Microsoft’s patents, for use with its NOOK eReader and Tablet products.

Microsoft had previously sued Barnes Noble, Foxconn, and Inventec claiming that the three companies employed the Android operating system, popular around the world, in violation of its patents. Barnes Noble had refuted the claims, leading to what appeared to be the start of a lengthy legal fight.

One of the first things that customers will be able to experience will be Barnes Noble’s NOOK app for Windows 8 (Amazon has also built a Kindle app) that will push e-book, magazine and newspaper content to Windows customers.

The two companies will also push education incentives via Barnes Noble’s College business, providing students and teachers will digital tools and content via Barnes Noble’s NOOK Study software.

“The formation of Newco 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,” said William Lynch, CEO of Barnes Noble. “Microsoft’s investment in Newco, and our exciting collaboration to bring world-class digital reading technologies and content to the Windows platform and its hundreds of millions of users, will allow us to significantly expand the business.”

Microsoft Is Investing $300 Million In Barnes & Noble! (AMZN, AAPL, BKS, MSFT)

Steve Ballmer hugging Ryan Seacrest

AP

Microsoft saves Barnes Noble’s Nook business

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Microsoft has invested $300 million in a joint venture with Barnes Noble.

The plan is to spin out the “Nook” e-reader business from Barnes Noble, along with its College business.

Microsoft’s $300 million investment is worth a 17% stake in the new company, which means it’s valued at $1.7 billion.

Amusingly, Barnes Noble’s entire market cap is $792 million.

Barnes Noble will own the rest of the company, and the new tablet focused company will still have a relationship with Barnes Noble bookstores.

In January Barnes Noble announced that it was exploring options to spin out its Nook business. At the time it appeared as though the Nook business was unprofitable. Barnes Noble said sales of the Nook Touch were worse than expected and investment in the Nook business is dragging on earnings.

Barnes Noble’s stock has shot up 80% on the news in pre-market trading.

There’s a lot to unpack here. Here are some of the things to think about:

Microsoft now has a stake in a company that is on a path to become a rival. The Nook Tablet, much like the Kindle Fire, is an entry level tablet. We doubt this new company is going to settle for making just Nook e-readers and entry level tablets. Eventually it will have a full blown tablet that rivals Windows 8 tablets.

Nook has forked Android for its tablet operating system. Again, this means Microsoft is investing in a rival platform, unless the new Nook company plans to ditch Android and use Windows 8 for its tablets. That seems unlikely. We assume it would take a lot of work to rebuild the code from scratch.

Microsoft and Barnes Noble were in patent lawsuits until recently. They’ve settle their patent disputes and are now partners.

This is Microsoft’s mode of operation lately. It is really into partnering with companies. Look at its deals with Facebook, Nokia, and now Barnes Noble. It’s much better than trying to build out an e-book business.

More to come, click here for the latest.

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