Microsoft has teamed up with Barnes & Noble in a venture aimed at grabbing a bigger share of the rapidly growing market for electronic books.
The world's biggest software group will make a $300m investment in a new Barnes & Noble subsidiary.
This will focus on the bookseller's digital reading capabilities, including its Nook tablet, and its college businesses.
The move appears to end a long patent dispute between the two firms and brings them together to battle Amazon's popular Kindle tablet and ebook reader, as well as the surging Apple iPad.
The Nook, which is the B&N competitor in the segment, will get an application for Microsoft's Windows 8 operating system. This "will extend the reach of Barnes & Noble's digital bookstore by providing one of the world's largest digital catalogues of e-books, magazines and newspapers to hundreds of millions of Windows customers in the US and internationally," a joint statement said.
The investment will give Microsoft a 17.6% stake in the as-yet unnamed unit that "will accelerate the transition to e-reading, which is revolutionising the way people consume, create, share and enjoy digital content," the statement said.
In January, Barnes & Noble - whose market value has plummeted in recent years - had announced plans to spin off its digital business to maximise value for its shareholders.
''The shift to digital is putting the world's libraries and newsstands in the palm of every person's hand, and is the beginning of a journey that will impact how people read, interact with, and enjoy new forms of content," said Microsoft president Andy Lees.
It was not decided whether the separation of the new unit will involve a new stand-alone company, according to the statement.
In February Barnes & Noble unveiled a new version of its Nook tablet, with the same $199 price tag as Amazon's Kindle Fire.
The announcement comes weeks after the US Justice Department sued Apple and five publishing firms alleging a conspiracy to raise prices and limit competition for e-books. As the competition case was unveiled, officials said three of the publishers agreed to end the scheme to force retailers such as Amazon to accept a new pricing plan that ended their ability to offer discounts for electronic books.
