Microsoft & Nokia: My Personal Thoughts

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Well, the big news has been swirling around the Interwebs for several hours now – that Microsoft is acquiring Nokia’s devices and services division.

A collection of industry pundits and financial analysts have been spinning their own perspectives on this already. The reaction seems generally positive, if measured.

Personally, I see this as a massively positive step for both Nokia and Microsoft (then again, of course I would, being an ardent pro-Microsoft guy).

The upside for Nokia is a no-brainer. The Devices and Services arm has been losing money for a substantial period now. The losses have reduced, but losing €33 million in their latest quarter is still a substantial hit! Offloading the loss-making phones division shores up Nokia’s balance sheet, and allows them to focus on their profit-making NSN division. In addition, it will make Nokia’s job licensing their mapping (HERE) and “Advanced Technologies” to other OEMs a much easier experience, since these are no longer tied exclusively to Nokia handsets. Topping this off, Risto Siilasmaa – Chairman of Nokia’s Board of Directors – himself admitted that “it’s evident Nokia doesn’t have the resources to fund the required acceleration across mobile phones and smart devices”. [Source: CNET]

The upside for Microsoft is less clear-cut. Spending €5.44 billion – in cash – is no small decision. Thankfully, it shouldn’t trouble those fickle American stockholders too much – this purchase is being funded by Microsoft’s overseas cash reserves – money that would have been difficult to repatriate into the US (and thus to shareholders) without incurring a substantial tax hit. So, what does Microsoft get for its cash?

Immediately, and in the short term, Microsoft gets control of the hardware component of Windows Phone. This is no small thing. The influx of 32,000 new employees (to an existing 90,000 strong workforce) will include among them the designers responsible for the signature Lumia look and the geniuses behind the 41-megapixel PureView technology. Microsoft are buying an awful lot of design and technical expertise – something that would have taken years to build organically. The acquisition helps to short-cut this process, and enables Microsoft to more seriously compete with Apple and Google/Samsung in the shorter-term.

Microsoft also instantly acquires a large, well-developed, and well-respected channel distribution network to mobile operators all over the world. As Surface so aptly demonstrated, creating great hardware is only half the battle. You need to get these devices into the hands of the consumer. Nokia has long cooperated with mobile operators, and the market share and visibility of Nokia’s Windows Phone devices – versus those from Samsung, HTC and others – demonstrates how important distribution and operator support is.

The acquisition also fits very neatly into Microsoft’s medium-and-long-term plans. Back in July, Microsoft announced a massive reorganisation for the business, announcing a “One Microsoft” that encompassed Devices and Services. Hardware devices suddenly became a core, strategic part of the entire Microsoft business (and not just “small” sub-divisions, like Xbox or keyboard/mice). Surface was the first play in this area, and the Nokia acquisition outlines just how committed Microsoft is to the “devices” part of their Devices and Services vision. The vision itself makes sense, especially in respect to Windows Phone. It was clear that – other than Nokia – OEMs were generally not pushing nor innovating on the Windows Phone platform. Their support seemed – frankly – lacklustre, almost as if they were paying lip-service, but not really trying. Nokia certainly invested and pushed the platform as far as they could, but were hampered by resources. Now, in the hands of a cash-rich owner, the hope is that Microsoft can make substantial investments into Windows Phone devices in order to create a better mesh between their hardware and software, as well as tighter integration into the overall Microsoft ecosystem (think Xbox, Skype, Office, etc.)

One last long-term observation. Nokia is still the 2nd-largest manufacturer of mobiles phones globally. Lumia (and therefore Windows Phone) accounts for only a small proportion of these sales – last quarter, out of 61.1 million units, only 7.4 million sold were Lumia phones. [Source: Nokia]  That’s an awful lot of “feature-phones”. Looking over the long-term, those feature-phone users will slowly upgrade to smartphones. If Microsoft can hold the customer loyalty, and spring-board Asha feature-phone buyers to Lumia smartphone buyers, then they are looking at a significant growth in overall market-share for Windows Phone. In order to do so, Microsoft needs to treat the Asha line of feature-phones with care and support, to convert those phone users to Windows Phone toting Lumia smartphone owners… This, I think, is Microsoft’s biggest challenge in the mobile phone space.

As a Partner, and as a long-time Microsoft supporter/fan, I’m extremely optimistic about today’s news. The potential for changing the mobile phone segment is massive… Please, Microsoft, don’t squander this brilliant opportunity through mismanagement, indifference or inaction!

2 thoughts on “Microsoft & Nokia: My Personal Thoughts

  1. Most expensive aquihire *ever*

    Also the acquisition of a low end feature phone division makes total strategic sense….. Ummmm (and the “giving access to emerging markets for MS services argument is a fig leaf)

    Why would you do the reorg and this transaction then leave. Mad hubris is why. Whoever takes over has basically had two massive decisions taken for them for which they will be accountable. Cannot fathom it.

    If you are going to buy Nokia, buy Nokia (patents. Brand. Everything). This is buying the worst bit of Nokia, then agreeing to lease the best bits on a non exclusive basis.

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    • In my opinion, the low-end market is *definitely* the area to pursue… Bear in mind that Nokia ship around 200 million units per to this segment – and as these emerging markets mature the hope is that a sizeable proportion of those markets will move to Windows Phone. This is already being demonstrated in regions such as Latin America, where Windows Phone has already become the 2nd largest phone platform . On that basis, I’d say that “fig leaf” is maybe a bit too harsh a term… ;) These low-cost, volume handsets will drive up market-share in general, allowing the deeper penetration of high-end flagship Windows Phones in more developed markets (by virtue of encouraging more apps to be developed in a wider WP ecosystem).

      Personally, I feel that Microsoft has walked a fairly strategic path here – this isn’t a case of kicking off a re-org, buying a massive devices company, then bailing. Look at the last month of activity at Microsoft – first, the re-org is announced, then the most vocally critical institutional shareholder is granted a position on the MS board, then Ballmer announces his retirement, and suddenly news of the Microsoft/Nokia acquisition. These actions have been planned for months (indeed, the Nokia buyout was first discussed in Feb 2013). The Microsoft Board – and still chaired by Bill Gates – will have been aware of these massive changes, and will all have approved each step along the way. These are long-term strategic decisions with the blessing of the Board, not quick-fire decisions from a CEO about to jump ship.

      By buying devices, Microsoft get the hardware design and technology expertise that would have taken them years to build organically – this is a massive short-cut to market. By leaving out the brand, NSN (which makes no sense in the Microsoft portfolio), and HERE – Microsoft have bought all the phone capability they need, with none of the excess extras, helping to reduce the buyout price.

      Only time will tell whether this is a great move, or spectacular disaster. However, after today, I’m feeling overall more confident for Windows Phone in the marketplace. :)

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