Government // Mobile & Wireless
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1/27/2012
11:47 AM
Paul McDougall
Paul McDougall
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Nokia Numbers Show Microsoft’s Mobile Madness

Every Windows Phone 7 device Nokia shipped in Q4 cost Microsoft $250, minus a royalty. But Microsoft is burning this cash with good reason.

What's the world's priciest smartphone? Hints: It's got nothing to do with fruit or robots, it comes from Europe, and it carries a 10-figure price tag.

Kudos if you guessed Windows Phone--specifically the variety produced by Redmond's Nokia division. Okay, Nokia is still an independent company, at least on paper and for now. But its Q4 report showed, along with a $1.25 billion loss, the extent to which it is now functioning as Microsoft's de facto mobile manufacturing arm.

In a filing, Nokia revealed that Microsoft paid it $250 million last quarter to churn out Windows Phone devices like the Lumia 900, and that it expects to receive billions more in Windows Phone "platform support" payments. That makes the Lumia line the most expensive phone going, at least from the standpoint of Microsoft.

Microsoft's alliance with Nokia is essentially an OEM relationship, except in this case the OEM keeps all the money but for the paltry "minimum software royalty commitments", estimated by some analysts to be as low as $15 per device, that Nokia hands back to Microsoft.

Nokia said it "sold" 1 million Lumia devices in the quarter (in quotations because there is no easy way to tell how many units actually made it to consumers or are simply idling in channel inventories). That means every Windows Phone 7 device Nokia shipped in Q4 cost Microsoft $250, minus the royalty. That's for phones, like the Lumia 710, that can be bought for $50 or less with a standard carrier contract.

Ordinarily, this would be madness. Even a kid with a lemonade stand knows you're supposed to sell stuff for more than it costs to make. But these are not normal times at Redmond. Microsoft's willingness to extend what is basically a billion-dollar bribe to Nokia, still the world's biggest handset maker by volume, to ditch Symbian and use Windows Phone as its default OS shows how desperate the software maker is to get back into the mobile race, where it badly trails Apple and Google.

There's good reason for that desperation. Microsoft's ownership of the desktop allowed it to dominate the computer industry through much of the 1980s and '90s. But in the so-called aughts and beyond, study after study shows that mobile is becoming the new desktop--for everyone from consumers to knowledge workers.

And Microsoft's presence in mobile is miniscule. Gartner estimates that Windows' share of the U.S. market is just 1.5%. Google, meanwhile, has already got more than half of the market sewn up.

That's a huge problem that goes well beyond the fact that Microsoft is making little or no net revenue from its mobile OS. The real value of any mobile platform nowadays is that it's a gateway to where the real money will be made--the cloud. It is from mobile devices that more and more consumers and businesses access lucrative online services like search, social networking, e-commerce, and entertainment. That's why Windows Phone is designed to put Bing right in your face, where it must be to override most users' instinct to Google what they're looking for.

The cloud also is where advertisers and merchants want to be. Amazon is selling the Kindle Fire at a loss-leading $199 because the device is merely a portal that individuals use to buy Amazon goods and services.

Microsoft's ability to generate revenue from cloud services, the source of most of the tech industry's growth over the coming years, will be severely crimped if it can't drastically increase its presence on mobile clients, and that includes tablets as well as smartphones.

Hence, CEO Steve Ballmer's willingness to use his biggest weapon--cash. Microsoft's got a ton of it, $51.7 billion, including short-term investments, to be precise. And it's becoming increasingly clear that Ballmer will employ that war chest to buy his way into strategic markets where Microsoft has fallen behind. Mobile is about as strategic as it gets right now.

So is it madness for Microsoft to pay Nokia $250 per device to make Windows Phones that might generate as little as $15 each in license fees? Sure, but it's not the sort of madness that implies lunacy. It's more in line with Webster's second definition of the word: "frenzied behavior." The company's efforts to become a legit mobile player had better be frenzied, otherwise its cloud ambitions could all but evaporate.

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EVVJSK
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EVVJSK,
User Rank: Apprentice
2/16/2012 | 6:41:56 PM
re: Nokia Numbers Show Microsoft’s Mobile Madness
If Microsoft has paid for the phones, why doesn't Microsoft just have a lottery and give the Nokia phones away. I am a Nokia E71 (older S60 OS) user who has not decided to go with Windows Phone, Symbian Belle OS, or Android (iPhone isn't going to happen for me). If Microsoft and Nokia GAVE me a Windows Phone, I would try it, but I not wasting my free upgrade or money on a Windows Phone at this point. If they gave me one, I would honestly evaluate it. Anyone from Nokia or Microsoft listening ?
toprat
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toprat,
User Rank: Apprentice
1/31/2012 | 9:16:08 AM
re: Nokia Numbers Show Microsoft’s Mobile Madness
So, what's the point?

Microsoft is using even less money than it is getting from Android manufactures to support Nokia transition in Smartphones to Windows ecosystem. Very good way to invest Android revenues to build own ecosystem. This is real and good capitalism.

Did you even read what is content of Nokia's $1.25 Billion loss?
Nokia is cashflow POSITIVE.
EUR 1 090 million (=$1.44 Billion) partial impairment of goodwill in Location & Commerce (= NAVTEQ). Article is like talking about Samsung Smartphones, but using numbers from Samsung TV sales.

ANON1250703092871
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ANON1250703092871,
User Rank: Apprentice
1/30/2012 | 10:19:03 PM
re: Nokia Numbers Show Microsoft’s Mobile Madness
This is Microsofts standard operating procedure, under sell the competition, regardless of cost to force them out of business. This how they killed CP/M. I hope it blows up in their face.
LxwebSolutions
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LxwebSolutions,
User Rank: Apprentice
1/30/2012 | 10:28:14 AM
re: Nokia Numbers Show Microsoft’s Mobile Madness
Nice read i must say
da cappin
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da cappin,
User Rank: Apprentice
1/30/2012 | 8:09:27 AM
re: Nokia Numbers Show Microsoft’s Mobile Madness
There is nothing wrong with making WP7 phones.

What stinks is Nokia betting its entire future on a languishing platform, on a 'third ecosystem' that has never, and will probably not, materialize. It stinks even more with Nokia having an ex-Microsoft man as CEO who infamously penned the burning platform memo.

Already the market numbers have spoken: the Lumia phones (and WP7 phones in general) are not selling well at all.

Nokia should be like HTC or Samsung: a couple of WP7 phones each year, and that's it.

By the end of this year, something will succumb: Stephen Elop's job, or Nokia's high-end smartphone corporate results.

Meanwhile, disaster in the form of Windows 8 is looming. Microsoft will be in for a rude shock if it thinks users are going to upgrade, or that it can wrest some market share from iPads and Kindles.
melgross
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melgross,
User Rank: Ninja
1/30/2012 | 2:03:14 AM
re: Nokia Numbers Show Microsoft’s Mobile Madness
You have no idea whether Samsung is considering dumping Android, of which they are by far, the largest seller, to move to WP7. Samsung is already a WP7 OEM, and has been since the beginning. Their WP7 sales have been abysmal! I can't think of a single reason to dump their successful Android business for their failing WP7 one.
melgross
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melgross,
User Rank: Ninja
1/30/2012 | 1:56:01 AM
re: Nokia Numbers Show Microsoft’s Mobile Madness
Those are terrible ideas! I've seen them elsewhere in posts by people, but they lack the business sense that would hopefully, for Microsoft's sake, make them a good idea.

Nokia is a hardware company. Mostly, it's a consumer phone hardware company. Its networking division is also doing terribly. Microsoft, except for the minuscule sales of its entertainment and devices division, is a software company. Nokia is losing both money and sales. Nevertheless, it's still almost as large as Microsoft is. But if Microsoft buys Nokia, it will be stuck with most all of Nokia's phone sales being cheap feature phones and basic phones.

Like Apple, Microsoft has no interest in those. They would also have to divest themselves of Nokia's failing network business which Nokia hasn't been able to shop around. Despite the poor business Nokia is in, a puchase by Microsoft would require a premium to Nokia's stock price, meaning that Microsoft might have to caugh up as much as $26 billion.

The problem is that Nokia is shrinking, and is losing money. Microsoft would have to take a very large hit to their margins, and how long would it take to integrate the two? Microsoft's stock would take a dive.

There would be no guarantee that their phones would sell after all that, and what would Microsoft do with the three quarters of Nokia's phone sales that aren't smartphones, and can't run WP7 at all? If they divested themselves of most of the company, they would have to write down most of the purchase price.

This is a terrible idea.

So is the idea of buying Sprint. If Microsoft did that, they would be pariahs to the other cell carriers, especially AT&T, their largest carrier, and one that has been pushing Wp7 phones very heavily. All of the other concerns mentioned for Nokia about financial risks would apply.
Guest
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Guest,
User Rank: Apprentice
1/29/2012 | 4:27:51 AM
re: Nokia Numbers Show Microsoft’s Mobile Madness
I agree with your conclusions. Microsoft cannot attempt to continue to control the entire IT world as they did with PCs and give the OEMs their table scraps. If they want to compete with Android and iPhone, they need a manufacturer. I still don't know if that will be enough. They cannot just say "well this is as good as product x and we are Microsoft" as they did in the past. They need their phones to perform a meaningful function that Android and Apple just do not have in order to make a dent.... Microsoft seems to be fighting against a rising tide of anti-Microsoft sentiment that is just happy to have a choice in computing for the first time in their lives. I think that is their largest problem. Microsoft is thought of as the monopolistic past.
Guest
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Guest,
User Rank: Apprentice
1/29/2012 | 4:05:50 AM
re: Nokia Numbers Show Microsoft’s Mobile Madness
Microsoft's big problem is that everyone knows the Microsoft ecosystem works well for Microsoft, not so well for the OEMs. See HP trying to get out of PCs despite being far and away the market share leader because the margins are terrible. I don't think Microsoft's horizontal strategy is viable in the smartphone space and it is barely viable in the PC space. Microsoft will need to acquire hardware companies, possibly HP and Nokia, to continue their model... either that or become much more generous with profit sharing. There is also the minor problem that no one wants Microsoft's products. That, strangely or not so strangely, is probably not their biggest problem.
frankyy
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frankyy,
User Rank: Apprentice
1/28/2012 | 9:16:19 PM
re: Nokia Numbers Show Microsoft’s Mobile Madness
I just registered to post that this is one of that craziest and probably silliest posts I've ever read. Since when does a payment such as the $250m from Microsoft, used for development apply to products already developed and on the market?

If you weren't aware, Nokia has decided to dump their mobile OS for Microsoft, which meant switching the gears considerably to support this new OS that they had no products built to the specs given to use this OS.

Microsoft is kick starting their ecosystem, as they have no choice when coming late to the iPhone and Android party. Yes, that is right, you need to invest to gain traction. In the meantime, Microsoft is making anywhere between $5-10 on most Android devices sold due to patents. Patents rule the world, Microsoft has many in mobile, which is why Samsung is considering dumping Android for Windows Phone, as they would gain access to Microsoft's many mobile patents. When Microsoft will have more traction in the mobile space, it will be making money and a LOT of it.

I've been seeing many of these commentaries about Windows Phone and Microsoft, but most seem to be from those who seem to know nothing about it, have never used it, or don't know the value of technology (including patents).
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