Microsoft now has its own smartphone manufacturing division, thanks to a $7 billion deal for Nokia’s devices and services division. The move is designed to allow Microsoft and Nokia to expand the Windows Phone brand and better compete with Apple and those making phones for Google’s Android mobile operating system, by giving Microsoft greater end-to-end control over the phones.
That’s the plan, anyway. Microsoft has been focusing on making its own hardware in the past year, introducing its Surface tablet. In a conference call Tuesday morning, Nokia made clear that this model is the main aim of the deal.
“The best opportunity for the device business to prosper is to be tightly aligned with the operating system and the associated ecosystem and cloud services,” said Nokia board chairman Risto Siilasmaa, in a news conference Tuesday morning.
To that end, this is a good move for Microsoft, said IDC analyst Al Hilwa.
“Nokia has a highly evolved device design and manufacturing process which will benefit Microsoft greatly. This is simply the fastest path in front of Microsoft to achieve something like Apple's vision on devices,” he said in an e-mail.
There is a lot of upside for Microsoft here. In addition to the $5 billion it spent on the Nokia hardware division, Microsoft also paid $2 billion to license key Nokia patents, giving it a lucrative cross-licensing patent deal with one of the oldest mobile phone business in the world. Plus, Microsoft also gains a handful of talented executives in the deal, including former Nokia president and CEO Stephen Elop. Elop, who came to Nokia from Microsoft, has been named by several analysts as a short-list candidate to take over for outgoing Microsoft CEO Steve Ballmer.
Still, even with all that Microsoft gains from the deal, the question remains whether it will be enough of an investment in the Windows Phone platform, particularly given Microsoft’s track record on smartphones and in the hardware space.
Sales of the Surface have failed to meet expectations. And while the Windows Phone has been climbing enough to maintain a tenuous hold on third-place in the global smartphone market, it has had little success making headway against Apple and Google. In the second quarter of 2013, 3.7 percent of phone shipments were for Windows Phones. By comparison, Android held an 80 percent share of the market, and second-place Apple’s iOS held a 13.2 percent share.
And Nokia, while a pioneer in the mobile phone business, isn’t exactly known for its cool factor. The firm’s flagship Lumia devices are strong, but have had trouble picking up share against firms such as Apple and Samsung. Some of Nokia’s greatest success has been making its cheaper Asha phones for less-mature smartphone markets. Microsoft touted its second-place status in Latin America last quarter, but it still faces heavy competition from Android for the lower-end of the market around the world.
Microsoft investors seemed underwhelmed by the deal, and Microsoft shares fell in pre-market trading — down over 4 percent ahead of the market’s open to $31.75 per share. Nokia shares, meanwhile, opened nearly 40 percent up, at $5.45 per share.
While Nokia investors seem to cheer the deal, it’s a bittersweet moment for the Finnish firm.
“This transaction makes all the sense rationally, but emotionally it gets complicated,” Siilasmaa said Tuesday.
Nokia executives also are conscious of the impact that this agreement will have on Finland’s economy. As the Economist reported last year, between 1998 and 2007, the firm paid as much as 23 percent of all Finnish corporation taxes. Both Ballmer and Siilasmaa were careful to underscore that this is a good investment for Finland.
“It is worth stressing that as a result of the agreement today instead of one Nokia there will be two global technology companies in Finland, both financially stronger and capable to invest in its future,” Siilasmaa said.
Microsoft has also committed to building a large data center in Finland, and Ballmer said during the news conference that Finland will be “the center of the phone, device, research and development work.”
The transaction is expected to close during the first quarter of 2014, following shareholder approval from both companies, as well as regulatory approval.
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