The deal is also a clear admission by Microsoft of a critical misjudgment that it could dominate the mobile-phone market in the same way it did PCs — as a pure software company, instead of by creating devices and systems that work together.
That strategy kept the company in a state of catch-up as Apple, Google and Samsung emerged as the new vanguards of smartphone innovation, creating their own tech ecosystems that dominate the global market.
Microsoft said Tuesday that by acquiring the Finnish phone maker, it will create a solid third competitor in the global smartphone device industry.
And it is betting that the combination of development, manufacturing and sales of smartphone hardware and software within one company will help “accelerate the growth of its share and profit in mobile devices through faster innovation, increased synergies, and unified branding and marketing,” according to a joint release.
The acquisition comes days after Microsoft chief executive Steve Ballmer announced he would retire as soon as he found his successor. Analysts predicted that Nokia President Stephen Elop, a former Microsoft executive, will be groomed for that role. Microsoft will acquire 32,000 Nokia employees around the world, and Elop will come to Microsoft to lead its mobile-device business.
“For Microsoft, this is a signature event, a signature event in our transformation,” Ballmer said Tuesday during a news conference at Nokia’s Helsinki headquarters.
Microsoft agreed to pay $5 billion for Nokia’s Smart Devices business, which includes the manufacturing and sales of its Lumia smartphone brand. Microsoft also paid more than $2 billion for a 10-year license for Nokia’s wireless technology patents, which it can extend after the term is up. Nokia will retain its telecommunications networking equipment business.
Ballmer’s strategy to rebuild Microsoft largely mimics Apple’s business plan. Apple tightly controls the production of hardware for its iPhone and iPad, as well as the development of the iOS operating system that runs on its devices.
In a 30-page slide deck explaining the deal, Microsoft said the acquisition of Nokia would immediately generate more revenue.
Microsoft only receives $10 per phone from Windows software royalties. Nokia phone sales will give Microsoft an additional $40 per unit.
Ballmer and other executives said the marriage would also allow the firms to work more closely together to come up with new devices.
The approach is a drastic reversal from six years ago, when the iPhone was introduced and Ballmer scoffed at Apple’s insistence on controlling so many facets of the product. He said Microsoft would make more money by licensing its software to as many mobile device makers as possible.
But it’s unclear whether Apple’s strategy is the best approach for Microsoft. Other competitors have tried to copy Apple’s success as a phone hardware and software maker, but with little success.
Google purchased Motorola Mobility in 2011 in an attempt to create a blockbuster device using its leading Android operating-system software. But the acquisition has been a disappointment, according to analysts.
“Apple is not a pattern, it is one company. And when you look at the market, Android is an even more widespread platform. So you have to ask Microsoft why it is taking that strategy headlong,” said Al Hilwa, an analyst at IDC Research.
Microsoft and Nokia began a partnership in 2011, when the Finnish firm agreed to use Windows mobile software on its smartphones, including the Lumia. It was an important partnership because most companies at the time were clamoring to use Google’s Android software. Nokia sold 7.4 million Lumia Windows smartphones in the second quarter.
But some analysts doubt Microsoft will be able to overcome deeper problems in its core business. Microsoft’s Windows mobile software has been criticized as too clunky and with too few applications, compared with Apple’s iOS and Google’s Android marketplace.
“At the core of Microsoft’s and Nokia’s problems is software,” said Roger Entner, a telecommunications analyst at Recon Analytics. “Microsoft’s efforts in the mobile-phone area are admirable, as they have created an operating system that is on par with that of the competition, but are falling just short. The problem is that Microsoft is not innovating fast enough. This is not only a mobile-phone problem, but a company-wide problem.”