Microsoft's Nokia Deal, Analyzed - InformationWeek

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9/3/2013
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Microsoft's Nokia Deal, Analyzed

Microsoft announced plans to buy Nokia's handset business for $7.2 billion. We examine the move's pros and cons.

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Rumblings about a Microsoft-Nokia acquisition have been around for months. Microsoft made the news a reality Tuesday and announced a $7.2 billion deal for the company's devices division. Talks between the two companies started as far back as February, but took off in earnest in July. According to the deal reached today, Microsoft is acquiring just the handset business from Nokia, as well as the "Lumia" and "Asha" brands. Nokia's networking business, services business and Here mapping teams will remain in Espoo under the Nokia brand.

In a letter to Microsoft employees, CEO Steve Ballmer said the move is "a bold step into the future." It's also the "next big phase of the transformation" the company announced in July. "We are very excited about the proposal to bring the best mobile device efforts of Microsoft and Nokia together," continued Ballmer. "Our Windows Phone partnership over the past two and half years has yielded incredible work. Our partnership has also yielded incredible growth. In fact, Nokia Windows Phones are the fastest-growing phones in the smartphone market. Now is the time to build on this momentum and accelerate our share and profits in phones."

All the rah-rah aside, it's a move that makes sense from a number of angles. Consider Apple and BlackBerry.

Apple makes not only the platform for its smartphones, but also the devices. iOS and the iPhone are fully under Apple's control. That means all the costs and all the profits are born and won by Apple. This strategy has worked well for Apple during the past six years. BlackBerry operates the same way, though its fortunes have headed south. BlackBerry makes both the operating system and the smartphones that run the OS. Though it stumbled (mostly due to bad leadership), its business model let it maintain control and own all the profits (when it actually made some).

To date, this is not how Microsoft has operated. It makes the operating system, and its hardware partners -- HTC, LG, Nokia, Microsoft, Samsung, ZTE and others -- make the hardware. There's been a seismic shift in the Windows Phone ecosystem during the last few quarters, though. At last check, Nokia was responsible for 87% of all Windows Phone handset sales. That's an incredible number that Microsoft could no longer ignore. With Nokia's design and manufacturing businesses under its purview, Microsoft can create more seamless products that work even better with its developing ecosystem.

Of course, we only have to look at the Surface debacle to know how badly Microsoft can screw up a hardware business.

One key aspect of the deal noted by Microsoft Tuesday is that the company will continue to license Windows Phone to other hardware makers, despite its new position as a hardware maker. (Microsoft is now in a position similar to Google, which bought Motorola's handset division, though it also licenses Android to other OEMs). Just because Microsoft says it is going to license Windows Phone, though, doesn't mean it is going to happen. This is one of the big risks being taken by Microsoft.

The purchase of Nokia's hardware business may scare off the few remaining Windows Phone vendors. Windows Phone is the third horse in a two-horse race between Android and iOS. Android is three-quarters of a length ahead while Windows Phone has barely left the gate. Why should HTC, Samsung and the others bother to make new WP8 devices given how few they were selling in the first place? There's little incentive for them now. Android is a cheaper and more popular option. If Microsoft loses these partners, it will be a blow to the company. HTC, for example, has been making Windows-branded hardware for 10 or more years.

Another sticking point of the deal is that Microsoft did not acquire the "Nokia" brand. It acquired the Lumia and Asha brands, which Nokia calls its smart devices. Nokia is holding onto its feature phone business and the Nokia brand. That means "Lumia" smartphones will no longer be Nokia devices, but Microsoft devices. Microsoft may have worldwide brand recognition, but Nokia's equity in the phone market is still invaluable. Nokia was smart enough to realize that and retain control over its brand. The problem this generates for Microsoft is that it will automatically lose some of the appeal Lumia devices carried with them.

Microsoft is certainly gaining a solid business. Nokia has done an admirable job turning around its smartphone division during the last two years. Though it still has a long way to go, perhaps Microsoft's ownership of the devices team will provide the resources it needs to keep churning out attractive, usable smartphones. In other words, let's hope Microsoft doesn't change anything about what Nokia's doing, especially if it means taking things in a more Surface-y direction. Microsoft will do well to let Nokia's designers keep doing what they're doing. There's a real chance the synergies created by having the hardware and software teams under one roof will (eventually) play off.

Microsoft is taking a big risk in alienating its existing partners, though. Some may throw in the towel, and no one would blame them for doing so.

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WKash
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WKash,
User Rank: Author
9/4/2013 | 8:11:39 PM
re: Microsoft's Nokia Deal, Analyzed
As former Microsoft mobile exec, Randy Siegel observes elsewhere on this site ( http://twb.io/1eftqBi ): Microsoft's Exchange platform may give Microsoft greater advantage in this deal than some suspect. He notes:

...both Apple and Google realized early on that if they were to meaningfully attack the enterprise market they would need to license and support the Microsoft's Exchange Active Synch (EAS) protocol.

Since EAS is supported or built-in to nearly all devices, Microsoft has an excellent chance of optimizing the Exchange mobile experience for its own products, especially in the management and security areas.
Michael Endler
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Michael Endler,
User Rank: Author
9/3/2013 | 5:01:08 PM
re: Microsoft's Nokia Deal, Analyzed
Investors seem to have mixed feelings on the "new" strategy, which is pretty predictable, considering the big gains and losses the company's absorbed over the last six weeks.

It's 1:00 on Wall Street, and Microsoft's stock is down 5.9%. It was worse a little earlier in the morning but the writing's still on the wall: A
number of investors looked at Microsoft's refortified commitment to
consumers and decided to jump ship. In retrospect, the ValueAct deal's
timing seems intended to allay the concern Microsoft knew investors
would feel when it purchased Nokia. Hard to know if a ~6% drop
qualifies as successful.

Microsoft will face a tough path under Elop or
whomever, but those who support the "one Microsoft" plan have to be
encouraged. The question for enterprise customers, of course, is whether
and when the consumer focus will help IT to be more secure and
productive.
Michael Endler
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Michael Endler,
User Rank: Author
9/3/2013 | 4:43:25 PM
re: Microsoft's Nokia Deal, Analyzed
It's a limited license option. Microsoft can continue to use the Nokia brand on all current products, and, for a limited period, on products based on certain feature phone platforms. It might be advantageous in certain markets, for example, for Microsoft to continue leveraging Nokia's name recognition in certain ways. But no future smartphones will use Nokia branding. The Lumia brand will live on-- but it will be Microsoft Lumia. I'll be curious to see if Microsoft juggles multiple smartphone lines--e.g. if there's Surface-branded smartphones AND a Lumia-branded family, or if the flagship Lumia is the de facto Surface equivalent. In any case, we ran an article a while back that described how Windows Phone fans were beginning to feel a little neglected. They must be pretty excited now.
Michael Endler
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Michael Endler,
User Rank: Author
9/3/2013 | 3:16:45 PM
re: Microsoft's Nokia Deal, Analyzed
At least one recent report notes that in certain markets, Windows Phone is the top draw among customers upgrading from feature phones. There's still significant growth potential in this market, so the recent progress is great move for Microsoft. The problem is, the people upgrading from feature phones aren't as likely to be the people who buy into larger ecosystems-- and Microsoft needs Windows Phone to feed the rest of the "one Microsoft" landscape, particularly Windows 8 and, to a lesser extent, Office, Bing, Xbox and the (soon-to-be-renamed) SkyDrive. Higher market share will serve some of these needs, but for others, Microsoft will need high-end customers-- a segment pretty much owned by Samsung and Apple. Microsoft will need to produce devices that show what the company can accomplish with tight hardware-software integration, but it will also need to walk a tightrope in targeting areas for growth. Buying Nokia helps, but there's a lot that still needs to be executed well.
RobPreston
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RobPreston,
User Rank: Author
9/3/2013 | 3:08:10 PM
re: Microsoft's Nokia Deal, Analyzed
I'm not so sure this is a "bold step into the future." It's a marriage of two market also-rans: Nokia's device hardware with Microsoft's Windows Phone OS. At least Google, in acquiring the declining device business of Motorola, brought the market-leading Android OS to the table.
Shane M. O'Neill
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Shane M. O'Neill,
User Rank: Author
9/3/2013 | 1:36:08 PM
re: Microsoft's Nokia Deal, Analyzed
Solid move by Microsoft to take ownership of smartphone hardware without having to develop it. But if OEMs like HTC and Samsung were hesitant to run WP before, why on earth would they do it now? Not sure Microsoft is in a position to go the Apple route with smartphones, but it had to make a bold move because current strategy is not working.
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