Why in the World is Microsoft Betting BIG on Nook?

Microsoft (NASDAQ:MSFT) is investing $300 million in Barnes & Noble’s (NYSE:BKS) Nook business and college-texts unit, giving the former a 17.6 percent stake in a new subsidiary for the businesses in a transaction that values them at $1.7 billion. Barnes & Noble’s current market capitalization is only about $791 million.

As part of the move, Microsoft will integrate a Nook application in its new Windows 8, which is scheduled to preview in early June. Computers and tablets with Microsoft’s Windows 8 operating system are expected to go on sale later this year.The Nook book-buying application has until now only been available on Apple’s (NASDAQ:AAPL) iPad and Android devices.

The move shows the two companies have overcome their earlier differences — Microsoft last year sued Barnes & Noble and the manufacturers of the Nook, charging that the device infringe its patents. At the time, Barnes & Noble said Microsoft was just trying to “bully” smaller companies that used Google’s (NASDAQ:GOOG) competing Android mobile operating system.

The two parties have settled their patent litigation as part of the deal. Barnes & Noble and the new subsidiary will have a royalty-bearing license under Microsoft’s patents for the Nook.

Barnes & Noble will gain access to more customers around the world, as Windows is used across the globe. And the Nook business will have a chance to return to profitability — in its fiscal third-quarter, the digital business reported a loss, before, interest, taxes, depreciation, and amortization, of $93.7 million, widening from a loss of $50.5 million a year earlier. B&N attributed the wider losses to continued investment, including its aggressive holiday advertising campaign, which helped it boost sales at third-party retailers like Target (NYSE:TGT) and Walmart (NYSE:WMT).

Windows 8 is said to be the most dramatic reworking of Microsoft’s operating system in at least 17 years, and its first significant effort to gain traction in the tablet market. Microsoft is also prepping a Windows 8 digital storefront for applications, which are a large source of revenue for tablet makers, but also factor into consumers’ decisions when buying tablets.

When Microsoft released a test version of Windows 8 to the public in February, its storefront had roughly 100 apps — there are more than 585,000 apps available for Apple’s iOS devices. The February preview of Microsoft’s Windows 8 app store featured Amazon’s (NASDAQ:AMZN) Kindle app for reading e-books.