Case Study
Microsoft swallows Nokia's phone business
Might be it is a project gold medal: why Microsoft raced to Nokia deal?
Microsoft's Nokia acquisition is 'a necessary gamble,' analysts say.
Bishnu Neupane, Sept 4, 2013
Microsoft said it has reached an agreement to acquire the handset and services business of Nokia for about $7.2 billion, in an audacious effort to transform Microsoft’s business for a mobile era that has largely passed it by.
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| Microsoft Inc. |
Microsoft’s agreement to buy Nokia’s handset business, codenamed Project Gold Medal, was more of a sprint than a marathon.
Talks between the two companies began in February after both sides agreed a two-year-old collaboration on smartphone development wasn’t working, according to people familiar with the deal.
By July, Microsoft and Nokia, based near Helsinki, settled on the price and structure of a 5.44 billion euro ($8 billion) deal to buy the handset business and license its patents, the people said. Nokia’s board met more than 50 times to deliberate on a sale, a process described as a soul-searching exercise by the people, who asked not to be identified.
Timed to follow last month’s announcement that Microsoft chief executive Steve Ballmer would retire, the Nokia deal is intended to set up the US company for a renewed assault on the smartphone and tablet markets, the people said.
Once the world’s most dominant technology firm, Microsoft under Ballmer has lagged behind Google and Applein fast-growing mobile devices, amid contraction in the personal-computer market it helped invent.
“Microsoft realised that it wouldn’t be possible to succeed without controlling the entire value chain,” said Francisco Jeronimo, research director for European mobile devices at research firm IDC in London. “Nokia has realised that it needed a stronger ally with the financial muscle to continue driving its Lumia smartphones.”
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| Microsoft CEO Steve Ballmer |
Late Monday night, Microsoft and Nokia said 32,000 Nokia employees would join Microsoft as a result of the all-cash deal, which would turn the Finnish mobile phone pioneer into the engine for Microsoft’s mobile efforts.
Stephen Elop, the former Microsoft executive who was running Nokia until the deal was signed, will rejoin Microsoft after the transaction closes, setting him up as a potential successor for Steven A. Ballmer, Microsoft’s chief executive. Mr. Ballmer has said he will retire from the company within 12 months.
“This agreement is really a bold step into the future for Microsoft,” Mr. Ballmer said in a telephone interview from Finland. “We’re excited about the talent capabilities it will bring to Microsoft.”
Nokia was once the mightiest company in the mobile phone business, but it has lost much of its luster as the industry shifted to the era of the smartphone. Samsung and Apple divide nearly all of the profits in the global smartphone business now.
A megadeal between Nokia and Microsoft of the sort announced Monday night is something that pundits and analysts have speculated about for years, after
Mr. Elop joined Nokia and
signed a pact with Microsoft in February 2011 to standardize on the software company’s Windows Phone operating system.
The fortunes of the two companies in the mobile business have become closely intertwined since that agreement, but it has done little to turn either company into a leader in the mobile business. Windows Phone accounted for only 3.7 percent of smartphone shipments in the second quarter, according to the technology research firm IDC.
Nokia remains the second-largest shipper of mobile phones in the world after Samsung, but that is largely because of lower-end feature phones, from which consumers are moving away. Nokia is no longer among the top five makers of smartphones.
A big question is whether Microsoft and Nokia will succeed as one company where they have not as close partners. Mr. Ballmer said Microsoft and Nokia have not been as agile separately as they will be jointly, citing how development could be slowed down when intellectual property rights were held by two different companies. “There’s friction,” he said.
Carolina Milanesi, an analyst at Gartner, says she believes the deal could help the companies respond more quickly to the dynamism of the mobile market. “They need to move faster,” she said.
Large acquisitions are fraught with peril, especially in the technology business, where there are challenges to integrating employees from different backgrounds into a coherent whole.
The Nokia deal echoes Google’s $12.5 billion deal to acquire Motorola Mobility, which gave it control of a trove of mobile patents and a handset business that has yet to shine under Google’s ownership.
While Microsoft still has enormous stockpiles of cash from its lucrative software business, there has been widespread speculation about how long Nokia could make it as an independent company, given how the spoils of the industry have gravitated to companies like Apple and Samsung. For Microsoft, there was risk that Nokia could have ended up as an acquisition target for another company, creating uncertainty around the future of their earlier business partnership.
Microsoft will pay about $5 billion for Nokia’s devices and services business and $2.18 billion to license Nokia’s patents. After it sells its high profile handset operations, Nokia will be left with three primary businesses: network infrastructure and services; mapping and location services; and a technology development and licensing unit.
The company will continue to do business as Nokia, licensing the Nokia name to Microsoft for use on its mobile phones for 10 years. “For Nokia today, it’s a moment of reinvention,” Risto Siilasmaa, the chairman of Nokia’s board, said in an interview.
Mr. Siilasmaa also assumed the title of interim chief executive. Since Mr. Elop plans to join Microsoft after the deal is closed, which is expected to happen in the first quarter of 2014, he resigned as chief executive and relinquished his Nokia board seat to avoid conflicts of interest. He has become a Nokia executive vice president, reporting to Mr. Siilasmaa.
Mr. Ballmer declined to say whether Mr. Elop, considered a leading contender to be his successor because of his familiarity with Microsoft and the importance of mobile to Microsoft’s future, will be considered for the job. “Our board is running an open succession process, considering internal and external candidates,” he said.
“I think it strengthens his potential for C.E.O.,” said Ms. Milanesi, the Gartner analyst. “It makes perfect sense.”
Mr. Elop, a native of Canada whose family still lives in the Seattle area, said in an interview that he believes the industry is at a “tipping point” where a third mobile phone ecosystem, based on Windows Phone, will emerge as a more vibrant alternative to the iPhone and devices running Google’s Android operating system.
In a sign of how vital Nokia’s partnership has become to Microsoft, Mr. Ballmer said the first calls he made outside Microsoft to discuss his retirement and succession planning at the company were to Mr. Elop and Mr. Siilasmaa.
Mr. Ballmer said his conversations with Nokia about an acquisition “heated up in the last several months,” but started during a mobile industry conference in Barcelona in late February.
For Microsoft, there is also an attractive financial dimension to the deal. Because Nokia is based in Finland, Microsoft can use a portion of its foreign-held cash to pay for the acquisition, allowing it to avoid hefty taxes it would otherwise pay to bring the cash back to the United States. Microsoft took a similar approach to its $8.5 billion deal to acquire Skype, the largest deal in its history.
The plan to buy Nokia is likely to upset the other companies that use Microsoft’s Windows Phone operating system on their devices, notably HTC and, to a lesser extent, Samsung. But there is little business there for Microsoft to lose. Mr. Ballmer said that Nokia’s phone currently counts for more than 80 percent of the Windows Phones sold.
Microsoft's Nokia acquisition is 'a necessary gamble
Microsoft’s acquisition of Nokia’s Devices & Services business is a necessary gamble for the software company’s future growth in mobile, and for Nokia an admission that it doesn’t have enough resources to successfully compete with Samsung and Apple, according to analysts.
The deal is a momentous one for both companies, and the end of an era for Nokia, which will now focus on mobile networking equipment and mapping and location services.
“With mobile now firmly positioned as the world’s fastest-growing and largest computing platform we see this move as a bold but entirely necessary gamble by Microsoft,” wrote Ben Wood, chief of research at CCS Insight, in a research note.
A necessary pivot
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| This acquisition may prove to be Steve Ballmer's most significant. |
The failure of Microsoft’s platform-only approach to the mobile market over the last 15 years—first with Windows Mobile and more recently with Windows Phone—has left it with few alternatives given its almost complete reliance on Nokia for Windows Phone devices and the competitive ecosystem strength of Google and Apple, according to Wood.
The deal, if approved, should be positive for both companies. But the challenge of integrating the two businesses shouldn’t be underestimated, especially at a time when Microsoft is in the middle of its own biggest ever re-organisation. History is littered with failed efforts of this magnitude, Wood said.
Carolina Milanesi, research vice president on Gartner’s Consumer Devices team, agreed:
“I think it is a question of timing, and time is running out for Microsoft to have a go at the mobile space. With Nokia it had a preferred partner, but this takes away any risk of Nokia moving [to another OS] or someone acquiring them,” Milanesi said.
Both think the acquisition will leave Microsoft as the sole maker of Windows Phones. That is, unless something significant happens to Android, according to Milanesi.
The speed at which Microsoft-Nokia can develop new smartphones, improve the underlying OS and get developers to create more apps will be key to the future success of Windows Phone, which is still a distant third in the ecosystem race. In the last six months Nokia has shown a greater urgency, and Milanesi hopes some of that energy will be injected into Microsoft.
The success of the deal will to a large extent depend on Microsoft’s ability to persuade the best Nokia employees to stay.
“I really think it would be a mistake by Microsoft to integrate the two and take over, because it doesn’t understand mobile. What is good about the Lumia smartphones has more to do with Nokia than Microsoft,” Milanesi said.
Transitions
The biggest change for Microsoft is that it will become a smartphone vendor, but the company also has to take advantage of Nokia’s know-how across the company to make sure that mobility pervades the whole organization, she said.
The future success of any smartphone vendor, including Microsoft, will also depend on its ability to offer competitive, low-cost devices for emerging markets from where most of the growth will come.
“Emerging markets will be crucial for the next phase of computing, and the phones will be the first step,” said Milanesi.
Nokia has been addressing this segment of the market with its Asha phones. But just like the Lumia family, those products are under heavy pressure from low-cost Android-based products, and as a result their sales have suffered. Microsoft must address this by continuing to push smartphones to lower price points, and should quickly develop a lightweight variant of Windows Phone to address this, according to Wood.
To make Windows Phone run on sub-$100 devices, there is a lot Microsoft could learn from the work Nokia has done on the Asha family, according to Milanesi. That is especially true for the Asha 501, for which Nokia developed a new touch user interface, she said.
The deal between Microsoft and Nokia also highlights how competitive the smartphone market has become, according to Francisco Jeronimo, research director for European mobile devices at IDC.
“I think it’s very clear that Nokia was struggling. This is the kind of decision that isn’t taken lightly, and I am sure there was a lot of discussion within the company. But Nokia must have understood that it didn’t have enough financial resources to compete, particularly with Apple and Samsung,” Jeronimo said.
The big question is what it means to the industry as a whole, which is going through some major changes. Microsoft’s acquisition comes just three weeks after BlackBerry announced it had formed a committee to explore strategic alternatives for the future of the company that could include joint ventures or a sale of the company, as it struggles to turn its new BlackBerry 10 operating system into a success.
“This isn’t just about developing a mobile phone. This is a very mature market, so you need financial muscle to compete and if you don’t have that you will struggle. That is what has happened to Nokia and what has happened to BlackBerry and HTC,” Jeronimo said.
A vendor like HTC risks being squeezed between Apple, Google, Microsoft and others while continuing to come under extreme pressure from emerging Chinese vendors. So more industry consolidation will happen, according to Wood.
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questions:
1. Why Microsoft raced to Nokia deal? What do you think?2. Why garbing Nokia is gold medal for MS? Do you believe it as a gold medal?3. Are you agree with- "Microsoft's Nokia acquisition is 'a necessary gamble"?4. How do you analyse this case in comparison with Apple, Google and Samsung?
