Microsoft is to acquire Nokia’s mobile phones business for $7.2bn (about $2bn of that for licences to patents, brand names and the Nokia Here mapping platform). It is a move that has been rumored ever since the two companies announced their landmark operating system alliance in early 2011 ‘ but whose actual timing still came as a shock.
Nokia CEO (and died-in-the-wool Microsoft man) Stephen Elop has perhaps fulfilled his destiny to bring the two firms together, and is now tipped to take over from Steve Ballmer as Microsoft chief. If that happens, it will just highlight how the fact that Microsoft has no game plan for the mobile and post-PC markets ‘ a lack of coherency which will be increased, not helped, by the Nokia purchase. Elop as CEO would bring a range of proven abilities, none of which could not be bettered by other candidates. And in terms of achievements, he would bring a distinctly dubious track record at turning around Nokia, and a starring role in one of Microsoft’s big mobile mistakes ‘ thinking it can be a hardware company.
At least the enterprise heart of the firm would be protected from that mistake if Microsoft were split in two. Some see the Nokia deal as a necessary precursor to breaking up the company ‘ strengthening the Devices and Services focus around which Ballmer has centered the non-enterprise businesses; tidying up the anomalies of a third party controlling nearly all Windows handsets; and combining those smartphones with the Surface and Xbox ranges to make a more coherent offering (likely converging their respective OSs too).
This business, increasingly remote from the enterprise and cloud activities that really power Microsoft, could be spun off as a would-be Apple under Elop’s leadership ‘ one element of the break-up plans various investors, notably the activist shareholder ValueAct, and analysts have recommended in recent months.
But in this event, would Nokia be an asset to a newly autonomous devices business, and how will Microsoft leverage its new asset, whether it is spun off or not?
The immediate motivations are all about building some kind of scale and unity for ARM-based Windows ‘ even if Microsoft would do better to move away from that platform altogether.
“Sales of Nokia Windows Phones have gone from zero, two years ago, to 7.4m units in the most recently reported quarter,” Ballmer said. “Now is the time to build on this momentum and accelerate it further. This transaction will…strengthen the overall opportunity for us to create a family of devices and services, for individuals and business, that empower people around the globe, at home and on the go, for the activities they value most.”
Nokia’s chairman echoed the sentiments. The decision to sell off the device business was “rational” but emotionally difficult, said Siilasmaa. “It’s evident Nokia doesn’t have the resources to fund the required acceleration across mobile phones and smart devices. Nokia has done great work. However, the industry is becoming a duopoly with the leaders building significant momentum at a scale not seen before.”
Nokia’s decision to adopt Windows Phone (having hung on too long to Symbian) arguably put it in that weak position in the first place, but whatever operating system it uses, the wounded firm can sure still make handsets, as the Lumia 1020, the PureView technology and the high end Ashas show, with their genuine innovation and engineering.
It would be nice to think that Microsoft’s deep pockets will give these devices the springboard they need, but unless it leaves Nokia entirely alone ‘ in which case, why buy it, and how will it achieve the reported $600m in synergies? ‘ it is likely to try to turn it into a firm centered on the OS and user experience, like Apple. That would be fine ‘ Nokia’s downfall was to keep plugging away at good hardware and fail on the UE side ‘ if Microsoft had a software platform to rival Apple’s. But of course, it doesn’t.
Both Google and Microsoft have pinned their mobile hopes on emulating Apple rather than trying to change the terms of the debate, as Mozilla is attempting to do. Neither has the financial structure, experience or ecosystem to support a strong business in commodity devices, which smartphones are rapidly becoming. Despite the furore around Moto X, the Motorola Mobility purchase has dragged down Google’s results, provoked spats with other Android licensees and contributed to a muddled device strategy. Microsoft is buying Nokia with even worse timing, since handsets are even further on their way to being low margin items which do little to enhance profits or brand power. And Nokia has no ‘post-PC’ offerings, so this really is a case of Microsoft investing in a commodity business, in which it has none of the skills to take on Samsung, and taking over a company it virtually controlled anyway, but without the burdens of ownership.
The rest of Nokia will be stronger without the handsets, but it hardly got a good price for its flagship division ‘ the sum equates to 0.35 times annual revenue, compared to a median of 1.4 times for recent wireless deals tracked by Bloomberg. This is no Google/Motorola transaction. In that deal, Google paid relatively highly (0.77 times revenue) for a company that had nowhere else to go, and was lucky to get a decent price before its value fell further. It was a masterstroke by Motorola Mobility CEO Sanjay Jha to insist that the search giant acquired his whole company, not just the patents. Elop has not played such a clever game, perhaps because he has been too close to the Microsoft mother ship.
It remains to be seen how Microsoft handles the Nokia products. Good sense would see it easing the focus on Windows Phone itself and doing what its Finnish partner should have done ‘ tap into its still-real power in emerging markets and midrange devices, and build a whole new platform optimized for high growth user bases. This would be based on the Asha browser/cloud OS, which ‘ with appropriate investment ‘ could be a rival to Mozilla’s Firefox Mobile and other modern, stripped-down mobile OSs.
That would have no hint of Windows Phone, which should be merged into Windows RT (if it survives) to create a single ARM-based platform. That should be distanced from the former Nokia and entrusted entirely to OEMs, ending the channel conflict which has dogged both Microsoft and Google since they entered the hardware game. But acquiring Nokia purely to create a splash in the midmarket will certainly be a step too far for Microsoft, which remains determined a) to insist that Windows Phone/RT can take a major share of the mobile OS space; b) to believe that will be achieved by a unified hardware/software platform developed internally.
Both these are myths based in outdated thinking, and perhaps, if Microsoft makes a sufficiently radical choice of CEO to replace Steve Ballmer, they will be debunked over time. But if, as is more likely, it chooses Elop or some other traditional Microsoft thinker, we can expect Nokia to become the vehicle for a conventional Windows-driven device strategy; further alienation and confusion among the PC OEMs; desertion of other Windows Phone licensees including the old ally HTC; and very little change to the operating system landscape.
Microsoft insists the deal will not mark the end of a broader ecosystem for Windows Phone, and that it will continue to license the OS to other players. Ballmer said the deal actually “grows the OEM opportunity’, adding: “I’ve talked to a number of OEMs who are more enthusiastic today than yesterday about their investment in Windows Phone. Certainly acceleration in Windows Phone is only good for Windows PCs and tablets,nand our partners in the PCs and tablets business seem to be quite enthusiastic because what is good for phone should be good for tablets and PC.’
But Siiasmaa was more coherent, and realistic, in his thinking on the wider ecosystem, commenting: “We cannot expect other vendors to invest as Nokia has grown to dominate Windows Phone.’ That meant, it was inevitable that Microsoft would take control, as it has with Surface, rather than pursuing a broad base of OEMs.
In reality, other vendors are likely to be even more lukewarm about the OS now ‘ in reality, Nokia controlled the huge majority of distribution for the platform. That can be seen as a reason why there was little point in Microsoft buying it since Nokia was almost as tied into Windows as the software giant itself. However, it will improve the margins of Microsoft’s mobile business, even while the financial structure of a commodity hardware firm may be a drag on the overall company. Microsoft said it currently makes 10% gross profit on Windows Phone devices, but will make about 40% by owning them.
But the debate has to move on from Windows Phone. iOS and, to a lesser extent, Android will start to see their massive shares eroded over time, but that will be because of changes in form factors and user behavior, leading to the rise of a new breed of cloud-oriented OSs, suited to affordable, attractive devices with limited resources, and to streaming rather than downloads. This space is in its infancy and there is everything to play for, so Microsoft could get in now and have a chance of being a more viable player than it was in the first wave of mobile OSs, by creating a new offering drawing on Nokia technology and its own past developments with Chinese and other partners. It could even make the devices since there would be no existing OEM base to alienate ‘ one reason why it succeeded with Xbox and not with Surface.
With Asha, it has the makings of a full mobile web experience in the midmarket where Nokia has always been strongest. The Asha ‘smart featurephones’ are as tightly integrated with their optimized Xpress browsers, email, imaging and other services as iPhones are with their higher end software. Asha and its software platform meet the rising need for cloud-oriented services that do not need resource-heavy handsets or even superfast connections. Firefox Mobile, propelled by Telefonica, and the other Linux-based challengers are addressing the same requirement, and Samsung clearly has its eyes on the entry level smart device as a market it could naturally dominate, either with Android or its own OS, Tizen. But Nokia is already established; it still has significant brand power and market share in key markets such as India; and its software platform is more mature than those of any alternative except, of course, Android.
But operators and some vendors are looking for alternatives and Microsoft/Nokia could be in contention here. Microsoft could look to the future with two key brands, both representing broad, multiscreen software platforms ‘ Xbox for media and high end users; Nokia/Asha or equivalent for the new cloud-based mobile world. No Windows brand anywhere.
But it is too late to create a rival Apple hardware/software platform in the smartphone world, and Microsoft, even with Nokia engineering behind it, is not the company to do it.
Key executives:
The Nokia deal will affect the major reorganization announced in June. Ballmer insisted that plan remains intact, but one obvious change is that Julie Larson-Green, named head of the new devices business unit, will now report to Elop a Nokia becomes the heart of that division.
Other Nokia executives will join Elop’s team, including smart devices chief Jo Harlow, operations head Juha Putkiranta, featurephone director Timo Toikkanen, and VP of sales and marketing Chris Weber.
Risto Siilasmaa, chairman of the Nokia Board of Directors will take on the role as Nokia Interim CEO.
Microsoft will also extend the remaining Nokia company $2bn in credit, split into three tranches to be repaid in five, six and seven years’ time respectively – a deal that will go ahead even if the mobile business unit fails.