Microsoft’s surprise announcement over the long weekend that it's buying Nokia's mobile phone business for just over $7 billion has set off a flurry of analysis from all directions. Here's a quick look at just the facts.
What’s the deal?
Microsoft is buying several Nokia business units, notably the Smart Devices unit (the Windows Phone-based Lumia smartphones), the Mobile Phones unit (feature phones, including the Asha line), along with their attendant operations, and an array of related services. That comes to just over $5 billion.
Microsoft is also licensing a bunch of related Nokia patents, under a 10-year non-exclusive license. There’s an option that lets Microsoft extend the patent agreement “to perpetuity.” This amounts to about $2 billion.
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Finally, Microsoft is signing a four-year license for Nokia’s Here platform – its mapping software, services, and so on. It’s paying Nokia something for that, probably a hefty amount, but no number has been announced publicly.
The deal is expected to close in the first quarter of 2014, or five to eight months from now.
Is this a big deal?
For Nokia investors, some stock speculators, and the Nokia employees affected, it’s a biggish deal. The size of the total transaction makes it seem like a big deal.
But apart from that, no one will really care by next week, or even tomorrow. Microsoft’s Windows Phone smartphone software, though well-regarded, has gone nowhere in three years. Nokia adopted Windows Phone as its platform and in the second quarter managed to sell all of 7.4 million Lumia smartphones. Compared to the Android and iOS phones sold in that same period, that’s almost a rounding error.
Why is Nokia doing this?
Basically, they gave up on phones. Nokia is going to focus on its wireless broadband business (LTE base stations and the like), its Here mapping service and platform (competing with Google Maps, among others), and “advanced technologies,” basically trying to come up with cool stuff it can license to other companies.
Why is Microsoft doing this?
Essentially, Microsoft is buying a working, global mobile device business, with existing expertise and processes, in order to “accelerate the growth of its share and profit in mobile devices,” according to the company’s press release.
Given Microsoft and Nokia’s current positions in the phone market, that’s a pretty low bar. If you go from one mile per hour to two miles per hour, you’ve accelerated. But you’re still losing the race because there are two guys way, way ahead of you, they’re going way faster than you, and they’re accelerating, too.
The acquisition by itself doesn’t change the market challenges, or Microsoft’s internal priorities. Those priorities can only be changed from within, by becoming less what Microsoft has been, and more what Nokia is. (See below, “Who benefits?”)
What resources does Microsoft get?
In terms of what’s measureable, Microsoft gets everything related to Nokia’s phone and mobile device business.
That includes Nokia’s design and development facilities, access to intellectual property and patents, manufacturing, logistics and distribution, marketing, customers, as well as revenues and profits, if there are any. In other words, pretty much everything that Microsoft, as a traditional software vendor, lacks in order to become, in its own words, a devices and services vendor.
What about people?
In theory, the sale will mean that about 32,000 Nokia employees worldwide – the people who actually do the hardware and software design, manufacturing engineering, logistics, marketing and sales and so on – will become Microsoft employees.
The big unknown: how many of those people, especially those in key positions in hardware and software design, will want to make the change?
These people also apparently include Nokia’s President and CEO Stephen Elop, and other members of this top management team. Elop is a former Microsoft executive himself. For the moment, he is stepping down from the top posts to become Nokia’s executive vice president, devices and services, until the deal is final. At least one analyst has gone so far as to suggest that, assuming Elop does move to Microsoft, he now becomes the top candidate to replace retiring Microsoft chief Steve Ballmer.
In the short term, stock market players. Nokia gets a big infusion of moolah, and a future stream of revenue from Microsoft through the licensing deal.
But whether Microsoft will benefit is a very open question. Its attempts at creating its own devices have been notable failures. Most recently, it wrote off $900 million of its investment in the Surface RT tablet; and three years ago, it wrote off $240 million in the cancelled Kin phone, and that doesn’t count the $500 million to buy the Kin’s originator, Danger.
In that sense, investing $7 billion in an already existing device business makes sense. The problem is that since the Windows Phone platform was announced and the first phone unveiled in the fall of 2010, that platform has gone exactly nowhere: it’s share of the smarphone market remains in the low single-digits. Under Elop, Nokia scrapped its own firmware and opted for Windows Phone, and it remains the only phone vendor aggressively pushing it. As noted above, Nokia is now selling just over 7 million smartphones per quarter.
Industry analyst Horace Dediu, in a post at his Asymco blog argues that a company being bought is “defined as the sum of three values: resources, processes and priorities.” Resources are the measurable assets, in this case, Nokia’s customers, revenues, and so on. Processes are what create, sustain, and expand these assets. But the key, Dediu says, are Nokia’s priorities.
“Priorities are the answers to the ‘Why’ question as much as Resources are the answers to the ‘What’ and processes are to the ‘How,’” he says. “They determine the direction and reasoning of why a company even exists.
“The acquired company’s Priorities (and hence Processes and Resources) become the guiding principles in the acquirer,” Dediu says. “It’s what happened when Apple bought NeXT and may have happened when Disney bought Pixar.
“My first thought on this is that Nokia’s priorities are not sufficient for the company that Microsoft wants and needs to become, but there are some priorities which are necessary and which it values.”