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Microsoft to buy Nokia’s mobile phone unit

In a two-horse race the news today is surprisingly all about the runner in third place – Nokia.

Microsoft has agreed a deal to buy Nokia’s mobile phone business for 5.4bn euros ($7.2bn; £4.6bn). Nokia will also license its patents and mapping services to Microsoft. Nokia shares jumped 45% on news of the deal.

The purchase is set to be completed in early 2014, when about 32,000 Nokia employees will transfer to Microsoft.

While Nokia has struggled against competition from Samsung and Apple, Microsoft has been criticised for being slow into the mobile market.

Describing the deal as a “big, bold step forward”, Microsoft chief executive Steve Ballmer says that his company was in the process of transforming itself from one that “was known for software and PCs, to a company that focuses on devices and services. We’ve done a lot of great work in the two-and-a-half years that we’ve been in partnership with Nokia, going literally from no phones to 7.4 million smart Windows phones in the last quarter that was reported.”

Microsoft, one of the biggest names in the technology sector, has struggled as consumers have shunned traditional PCs and laptops in favour of smartphones and tablet PCs.

Analysys Mason Principal Analyst, Ronan de Renesse, comments: The acquisition will have a limited impact on the smartphone market in short/medium term. Nokia and Microsoft have been working hand-in-hand for 2.5 years on the Lumia device range and we don’t expect the acquisition to fundamentally change the Lumia team and its product roadmap for the next 12 months.

The biggest opportunity for Microsoft is in the non-smartphone space. Microsoft will gain a foothold in developing market via Nokia’s non-Lumia device portfolio; 45.5% of Nokia mobile device shipments went to Greater China, Middle East & Africa and Latin America in 2012. This strengthen Microsoft’s position versus Google in connecting the next billion people.

Microsoft must make a decision on the business model to adopt in mobile. The handset market is extremely competitive making it particularly hard to sustain high margins and make a profit. Microsoft has the ability to undercut its competitors and use mobile as a loss leader to gain global reach for its services and software ecosystem. No handset manufacturer except Nokia has been fully committed to Windows Phone platform in the past 12 months. Maybe it’s time for Microsoft to abandon its Windows licensing model in mobile.

Commenting on Microsoft’s announcement of its intention to buy Nokia’s mobile phone unit, Victor Basta, managing director of Magister Advisors, M&A advisors to the technology industry, said: “Microsoft effectively ‘acquired’ Nokia several months ago when it entered into a deal to license Windows Mobile to Nokia, making Nokia entirely reliant on Microsoft’s software for its mobile future. Nokia’s value has eroded progressively since, making the actual deal to acquire the mobile business even more attractive now for Microsoft. In the meantime Microsoft has had the chance to work with Nokia and learn about the business, so this now looks like a safe deal for Microsoft. The burning question, of course, is whether Nokia’s gradual erosion – in market share, value and perception – can be reversed.

Microsoft must be betting that with more control they will be able to reengineer the business and gain market share. There is a huge array of challenges in the way though. There is fierce competition in the market and the competitor set in mobility has changed as fundamentally as the PC market changed when Microsoft entered it in the early 80s.

The risk for Microsoft is that this deal is a me-too strategy on the heels of Google’s deal with Motorola and a fundamental recognition that Apple’s content and hardware ecosystem is the only model that can work. In fact Microsoft is attempting to ‘recreate Apple’ by combining its software and hardware under one roof.

This still leaves the strategic question of how Microsoft will be competitive in the mobile space. A ‘me too’ strategy, catching up with Apple is not likely to succeed. Microsoft needs its own strategy in the marketplace, and Nokia alone will not deliver that strategy.

Nokia employs 30,000 people too, which will make integration a costly, time-consuming and inevitably blood-letting exercise. This feels like a clean up deal at the end of an era.”

Nigel Hawthorn, Director EMEA Marketing, MobileIron, said, “Blackberry is big news here. This year we’ve already seen Windows 8 overtake Blackberry in shipments, and with this announcement that position is further strengthened. As the mobile handset industry consolidates – with Motorola acquired by Google and Nokia by Microsoft, this leaves BlackBerry as a small fish in a global pond.”

“In the enterprise, BlackBerry’s traditional stronghold, I’ve always believed there would be three main Operating Systems. Android and iOS rule right now of course, and just 12 months ago the battle was really on for that third spot. I think this news answers that question. For now.”

Adrian Barnard, MD of reseller Modern Communications, says: “This is a great deal and it will be interesting to see Microsoft’s next move. Blackberry’s ubiquity, client base and excellent data security would make it a perfect fit.”

Chris Millington, UK & Ireland MD at Doro, commented, “My first reaction is wow – the mobile industry is capable of such incredible change. Whilst this news is not a surprise, it does mean that Microsoft will now have the platform to deliver its mobile strategy. For business users specifically, this really does signal a significant opportunity – especially for Nokia’s smartphone offering. However, does it mean the end of Nokia’s feature phone business? Will future product development and focus now shift to Microsoft-only smart devices?”

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David Dungay

Editor - Comms Business Magazine

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