Microsoft-Nokia deal is a marriage of convenience, say analysts

by Sohini Bagchi    Sep 05, 2013

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For the entire business community, it’s currently, Nokia: A Microsoft company. Microsoft’s announcement of the acquisition of Nokia’s devices and services division as part of a $ 7.2 billion deal has already shaken the entire technology and business community, even though many in the industry believe the sale was inevitable, and there were rumours on the same. Nevertheless, its one of the biggest acquisitions in the history of technology, with the announcement coming two and a half years since these biggies announced a strategic partnership in an attempt to regain market share lost to the competition.

A new era for Microsoft

Some analysts remain optimistic on the software company’s prospects of enhancing its presence in the lucrative smartphone market, while others believe it brings the end of the company which in all likelihood, sold many of us our first mobile phone a decade or more ago.

According to Manasi Yadav, Senior Market Analyst, IDC India, “This announcement reaffirms Microsoft’s strategy to be known as a devices and services company. Nokia not only brings with it strong brand equity in the consumer driven phone market but also gives Microsoft an enhanced access to emerging markets with an access to widespread channel partner and hardware manufacturing ecosystem. Further, this may open up possibilities for Microsoft to lower its mobile OS licensing costs, thereby bringing down the total cost of owning a mobile device.”

Microsoft certainly stands to win as it gets all of Nokia’s phones, and ten years of patents, including 8,500 design-related patents, and 30,000 utility patents and related applications. New mobile phones will have Microsoft labeled on it.  Microsoft will also get Stephen Elop back, who joined Nokia as CEO back in 2010, and will rejoin Microsoft to lead its devices division. He will be joined by several other key Nokia executives to spearhead innovation – if not all, like Nokia’s top VP of Design, Marko Ahtisaari, though, who confirmed his exit in November. Nearly, 32,000 of 88,000 Nokia employees will work for Microsoft

Yadav highlights that the Windows apps’ ecosystem still remains nascent and the synergies around co-developing this ecosystem have not surfaced yet. It will be interesting to see how Microsoft can now leverage its combined capabilities hereafter, to gain a sizeable market share in an Android dominant Indian market. This deal also weds Microsoft’s strong enterprise presence with Nokia’s consumer focused outlook, which might lead to interesting developments around launching enterprise solutions around BYOD, provided the app ecosystem matures accordingly.

Nokia is not dead

Nokia, which remains the world’s number two mobile phone maker behind Samsung but was increasingly being dominated by the likes of Apple and Samsung, has described the deal as “the best path forward”.

Nokia will continue to remain, but it won’t make phones. A senior official defines the company’s three main lines of business. These include: Network infrastructure by the virtue of buying out Siemens, Here Maps on mapping and location services where Nokia will remain free to work on integrating it into cars, as was recently announced and high-end technology development.

As a part of this deal, Microsoft also gains access to Nokia’s (barring NSN) design patents and related Intellectual Property (IP), which can be leveraged to drive focused innovation around the Asha and Lumia platforms. With common kernels and closer integration between different Windows devices, it is imperative for Windows to create its own experience and speed-up innovation; their focus should be to both protect and grow their share in India.

On the other side, Yadav points out there arises a doubt around this acquisition on potential alienation of other OEMs that were looking to launch devices on a Windows platform. However, the official communication from Microsoft suggests that they will continue to license Windows Phones to other manufacturing partners as well. Moving forward, it will be interesting to watch how they (Microsoft) will defend their ecosystem in price competitive markets like India.

 “The acquisition has the potential to be highly beneficial to Microsoft as it would help strengthen tablet and mobile-phone) presence.  But a greater benefit might be to the broader market (especially India) where the adoption of smart-phones might be accelerated and a more robust mobile app ecosystem would be formed,” she says.

A collaboration of convenience

Many in the industry consider this as a collaboration of convenience. Barclays analyst Andrew Gardiner outlines that Nokia gets focus and value it wouldn’t have received from devices anyway. And therefore, it’s not a raw deal for the company anyway. The company was losing its market share to more aggressive phone makers such as Samsung and Apple for a while, especially after the smartphone boom.

“Microsoft cannot walk away from smartphones, and the hope that other vendors will support Windows Phone is fading fast. So buying Nokia comes at the right time,” said Carolina Milanesi, an analyst at Gartner, told Reuters. “In today’s market it is clear that a vertical integration is the way forward for a company to succeed. How else could Microsoft achieve this?”

She adds that at the same time, Nokia always had the vision, but executing on that vision was impossible for them. The deal will make collaboration between the two companies easier and richer, she says.

“Now it is one team and from the looks of it Elop is the best candidate as CEO of Microsoft which would help integrate his key people faster.” mentions Milanesi in a blog.

However, does this mean the dream of a Nokia-produced Android phone has finally died? Well, it’s certainly dead for the next few years, believe analysts. Nokia can’t use its name on any mobile product until the end of 2015 and Microsoft owns the Lumia name and just purchased Nokia’s entire infrastructure for building phones. After that, we never know, whether Nokia will want to return to producing mobile hardware and surprise the market!