Microsoft buys Nokia’s phone business for $7.2 billion in an attempt to imitate Apple

If you thought that some kind of Grand Plan was afoot when Stephen Elop moved from Microsoft to Nokia in 2010, you were right: Microsoft has announced that it will acquire Nokia’s mobile phone business and a “broad intellectual property license” for Nokia’s patent portfolio, for 5.44 billion Euros (~$7.2 billion). 


This deal will see Stephen Elop return to Microsoft as the vice president of the newly minted Nokia division, along with some 32,000 other Nokia execs and employees. (And yes, Elop could become the next CEO when Ballmer leaves.) Microsoft’s rationale for the acquisition, which is due to complete in early 2014, is that it will allow the software giant to finally, seriously, definitely compete against Apple, Google, and Samsung in the smartphone and tablet markets. For real this time. Honest.
Way back when Stephen Elop joined Nokia from Microsoft, and then a few months later announced that the Finnish company would exclusively produce smartphones based on Windows Phone, there were rumors that Elop was in actual fact a trojan horse sent by Microsoft to ready the company for acquisition. In the couple of years that followed, under Elop’s leadership, Nokia’s stock value dropped by around 85%, lending an awful lot of credence to this idea. Elop, of course, denies it — but to be honest, it doesn’t really matter.

Two wrongs make a right?

The fact of the matter is that these two beleaguered and outmaneuvered giants desperately need to seek refuge in each other’s arms. Microsoft, following its continuing failure to push into the mobile devices market, needs Nokia’s manufacturing expertise and intellectual property portfolio if it wants to stand a hope in hell against Apple and Google. Nokia, which used to be the largest phone maker in the world by some margin, has completely failed at catching up to Samsung and other smartphone makers, and now probably views acquisition as one of only a few ways of circumnavigating eventual bankruptcy.
In essence, what we have here is two almost-irrelevant third-place companies seeking to join forces, with the long-term goal of becoming relevant. Microsokia would obviously love to become number one or two, but it would happily settle for selling enough units that it’s actually relevant in the grand scheme of mobile computing. There is a critical mass that Nokia and Microsoft need to reach, to enjoy the same level of consumer mindshare and press coverage enjoyed by Android and Apple — and neither company is there yet. In its Strategic Rationale [PDF], which outlines why Microsoft is acquiring Nokia’s mobile phone business, the company says that it’s aiming for 15% of the smartphone market by 2018 — presumably behind Android and Apple. 15% might not sound like a lot, but given the size of the estimated smartphone market (1.7 billion shipments) it would be more than enough to guarantee relevance and survival for Nokisoft.
Almost one third of the acquisition cost (€1.65 billion) was to secure Microsoft with a 10-year license to Nokia’s portfolio of 30,000 patents, with the option of extending that to a perpetual license. Along with Qualcomm, Nokia has the best collection of wireless connectivity patents. As you are probably aware, ever since the original iPhone came to market in 2007, the mobile device market has been hampered by one of the bloodiest intellectual property wars of all time. The only real defense, given the broken patent system, is to own enough patents that you can countersue when you get sued. This is one of the main reasons why Google acquired Motorola’s mobile phone business for a massive $12.5 billion, and why a consortium paid $4.5 billion for Nortel’s telecoms-related portfolio. It’s a steep price to pay, but it beats having a judge hand down an injunction banning sales of your device due to an IP infraction. (See: The Patent War: Is it killing innovation?)

Microsoft, the device maker

Ultimately, this acquisition is all about Microsoft’s future as a mobile device maker — specifically, a maker of Windows Phone and Windows 8 devices. The Nokia acquisition will massively bolster Microsoft in the areas of device design and engineering, distribution and sales, supply chain management, and carrier/operator relationships. The patent license, plus other savings from vertical integration, will significantly reduce the cost of producing each smartphone — and of course, instead of getting just a Windows Phone royalty fee for each device sold, Microsoft will now get the (much juicier) hardware profit margin as well. Microsoft will also acquire Nokia’s dumbphone business (the Asha series), which appears to be doing quite well in developing markets.
When it comes to Windows 8, Nokia’s potential input is a little murkier. Microsoft is gearing up to release its second-generation Surface tablets alongside Windows 8.1 in October, and as far as we know Nokia had no involvement in their creation. There is an upcoming Nokia Lumia 1520 phablet, but it runs WP8, not Windows 8. It is possible that we will see Nokia-branded Windows 8 tablets some time in 2014, but this is definitely a case of wait-and-see. Maybe Nokia will create the third-generation Surface, but it will still be branded Microsoft? Who knows. (See: The $200 Windows 8 tablet will change everything.)
Microsoft’s acquisition of Nokia is outwardly a very sound move. In one fell swoop it has become a viable device maker that, if the design, engineering, and marketing stars align, could compete with Apple. It will take a truly monumental effort to go from “making more money per Lumia device sold” to “competing with Apple and Samsung at the top of the smartphone market,” though. Acquiring Nokia is just the first step — a tentative perambulation that doesn’t automatically imbue either company with the visionary foresight required to win significant market share or develop entirely new markets.
Despite spending more than $7 billion, Microsoft simply hasn’t laid out a clear plan for how it will get from A (acquiring Nokia) to Z (becoming a relevant player in the mobile device market). It’s easy enough for outside spectators like myself to draw some imaginary dots between A and Z, but in reality the situation is infinitely more complex. I hope that I’m wrong, but I get the feeling that Microsoft doesn’t have a plan that gets it all the way to point Z. This whole thing feels a lot more like the reactionary machinations of a once-great beast that has been backed into a corner until it snaps.