Nooks offered for sale at a Barnes & Noble store.
Photograph by Scott Olson — Getty Images
By Phil Wahba
December 4, 2014

After more than two and a half years, Barnes & Noble (BKS) and Microsoft (MSFT) are ending their partnership in the money-losing e-reader and tablet Nook business the bookseller has dramatically scaled back in the last year.

In April 2012, Microsoft invested $300 million in Barnes & Noble’s then fledgling Nook digital books and device business, giving it a 17.6% in a unit in the division, and pledged to pump in another $305 million in the 5 following. The idea for Microsoft was to challenge Amazon.com (AMZN) and Apple Inc’s (AAPL) near stranglehold on the exploding tablet computer market. Microsoft was also eyeing a foothold in the publishing industry as electronic distribution was growing.

But Barnes & Noble’s Nook adventure, which started off well in 2009 with well-received e-readers that held their own against Amazon’s Kindle, turned into a cash sinkhole as consumers balked at the tablets, preferring to buy Kindle Fire and iPad devices. Barnes & Noble last year scaled back its Nook business dramatically to stanch losses that were in the hundreds of millions per year at one point, and now only works with a manufacturer, Samsung, to sell new devices: in August, Barnes & Noble launched its first new tablet in almost two years,

Barnes & Noble said on Thursday that it had reached a deal with Microsoft to buy back its stake in the Nook division, which the bookseller is planning to split off into a separate, publicly traded company at some point before August.

At the time the deal was announced, market watchers speculated that Microsoft would pour its significant tech firepower into the Nook devices and leverage it to become a big player in the tablet wars. But ultimately, Microsoft did little with Nook, and even decided ultimately to create its own tablet, the Surface.

While revenues from the Nook business fell 41.3% in the quarter ended Nov. 1, there was a big bit of good news for Barnes & Noble: after years of decline, comparable sales in its core book selling business rose 0.5%, showing there is life yet in traditional book selling. Indeed, the growth of e-books market has slowed dramatically in recent years- while they now account for 27% of trade books sales, according to the American Publishers Association, they only rose 3.8% in 2013.

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