Microsoft announced Monday that it is investing $300 million in the Nook, the Barnes & Noble e-reader that is the closest competitor to Amazon's Kindle. The investment gives Microsoft a 17.6 percent stake in a new entity valued, based on the infusion, at $1.7 billion.

While they have yet to name the new company -- it is referred to as Newco in the statement -- the new partners did announce that there will be a Nook app in Windows 8, Microsoft's next-generation desktop OS expected to launch with a near-final version in June. As part of the deal the two companies have also settled patent litigation.

Microsoft previously announced the end of Microsoft Reader. This deal gives it a chip in a really big game.

"Obviously this is a ploy by two players who are behind the leaders in their respective markets to join forces in hopes they can balance out each other's weaknesses," Forrester analyst James said. "If they really push it -- and it's a big if because it's really Microsoft that would have to push the Nook business into all of its other platforms, including the Xbox -- this could be Microsoft's attempt to compete with iTunes. But that will require an appstore as well, which is another important piece that they don't have. But you have to start somewhere."

Unlike Borders, Barnes & Noble has managed to jump across book publishing's digital divide, created by Amazon's release of the first-generation Kindle not quite five years ago. But while the nation's largest book retailer still operates several hundreds of stores — and earned $1.49 billion from them in its most recent quarter — that amount represents only a 2 percent year-over-year increase (and was likely helped considerably by the dissolution of Borders). On the other hand, Nook sales — which include the readers, accessories and e-books — increased 38 percent to $542 million in the quarter.

Clearly it's in the digital play that any real growth exists. That was the reason Barnes & Noble announced in January that it was exploring ways to somehow separate the Nook: The better to clear the field for a business with different needs — and prospects — than print and retail establishments.

“This is about requiring sustained investment in the Nook business to grow and expand internationally,” Forrester analyst Sarah Rotman Epps told Wired at the time. "A separate Nook business may be able to attract new investment and partnerships and innovate more quickly."

Apparently so. Now B&N not only has new cash on hand but a global distribution partner whose desktop software — unlike the Nook — is used in every corner of the world. As for that separate Nook division? Like the name of this Microsoft/Barnes & Noble tie-up, that's still up in the air.

"Barnes & Noble is actively engaged in the formation of Newco, which will include Barnes & Noble’s digital and College businesses," the statement says. "The company intends to explore all alternatives for how a strategic separation of Newco may occur. There can be no assurance that the review will result in a strategic separation or the creation of a stand-alone public company, and there is no set timetable for this review. Barnes & Noble does not intend to comment further regarding the review unless and until a decision is made."

Photo: The Nook Simple Touch with GlowLight makes makes it possible to read in the dark. Courtesy Barnes & Noble