Software major Microsoft has agreed to a deal to buy Nokia’s mobile phone business — which includes both smartphones and feature-phones for 5.44bn euros ($7.21bn), minus the patents.
Key highlights of the Microsoft-Nokia deal.
- Nokia’s patent portfolio will remain part of Nokia, Microsoft will gain a ten year non-exclusive license to its use. Nokia’s HERE maps are also licensed to Microsoft under a ten year non-exclusive basis. Euro1.65bn of the Euro5.44bn deal covers licensing of intellectual property, just the remaining Euro3.79 is for the purchase of the devices unit.
- Microsoft gains ownership of Lumia and Asha brands, and has a ten year license to use of Nokia brand on non-smartphones. Nokia is prevented from competing in the handset business entirely until 2016.
- Stephen Elop stands down immediately as Nokia CEO and is now Nokia EVP Devices Services and will join Microsoft on the close of the transaction.
- Approximately 32,000 Nokia employees will transfer to Microsoft. Phone hardware development will continue to be based in Finland.
- HERE maps and NSN networks business will remain as the core of Nokia’s ongoing product portfolio.
Microsoft-Nokia deal – Detailed Analysis
Ian Fogg; “This is a high-risk but high-potential reward strategy for Microsoft. Outgoing Microsoft CEO Ballmer is locking in Microsoft and his successor to the “devices and services” strategy he announced last year by buying one of Microsoft’s key hardware partners.
Also, it is the end of the beginning for Nokia’s Windows Phone strategy. There are enormous challenges ahead. All of the problems facing Windows Phone continue to exist and Microsoft must re-double its efforts to speed mobile innovation with the new vertical structure. But competition in mobile will be fierce.
The new company has a long road ahead to establish Windows Phone as a viable competitor to Android and Apple’s iPhone. In the second quarter of 2013, Nokia shipped just 7.4 million Windows Phones compared with 31.2 million iPhones and 185 million Android smartphones. IHS forecasts that unless Microsoft speeds Windows Phone innovation, in 2017 Windows Phone will comprise just 5 percent of overall smartphone shipments.
To succeed with Windows Phone and change this forecast, Microsoft must increase both the quality and quantity of third party Windows Phone apps. It must spend tremendously on marketing and channel incentives to drive Windows Phone awareness with consumers and ensure Windows Phones are widely ranged by mobile operators.
Microsoft must also increase the pace of Windows Phone feature innovation, end the disjointed experience of multiple maps and camera apps on Lumia smartphones, improve multitasking and add key enterprise features such as VPN support which it is frankly astounding that are still omitted. Microsoft must also accelerate Windows Phone support for new hardware: as of this announcement there are still no Windows Phones shipping with 1080P high definition (HD) screens or quad core processors. Android handset makers have been shipping such quad core models for over a year and 1080P screen devices since early 2013.
Microsoft is right to buy Nokia’s non-smartphone business alongside Lumia smartphones because this provides a route to up-sell prospective feature phone owners with Windows Phones. As all mobile phones become smart, Microsoft will be well-placed to drive the transition.
This deal provides a neat escape route for Nokia from its struggling handset business. In February 2011, then Nokia CEO Stephen Elop made the courageous decision to switch Nokia’s smartphone strategy to Windows Phone. In the process, Elop killed Nokia’s Symbian and MeeGo smartphone operating systems. Since then, Nokia smartphone shipments have collapsed from 24.2m in Q1 2011, to 6.1m in the same quarter two years later in Q1 2013.
With hindsight, Elop’s decision to use Windows Phone was the wrong decision for Nokia because Nokia has struggled to establish Windows Phone volumes. And, while Nokia expected it would be impossible to differentiate handset designs using Android, its handset maker rivals have successfully built sophisticated user interfaces and custom apps on top of Android that makes a Samsung smartphone feel very different to one from HTC or Sony.
But in 2013 it would be much harder for Nokia to switch to Android. Its former subsidiary Vertu has launched an Android smartphone. But for Nokia to switch to Android would have required large investments, patient shareholders, a new management team, and Nokia would have had to accept being a smaller part of the smartphone market. Selling to Microsoft is a more natural continuation of recent Nokia strategy rather than a u-turn in direction.
The price of today’s acquisition is a reflection of Nokia’s handset business challenges in the aftermath of the Windows Phone switch: Euro 5.44bn is a fraction of the price that Nokia would have fetched two years ago. Also, it’s significantly lower than the $12.5 billion that Google paid to buy Motorola’s mobile device business in 2011, even though Motorola Mobility was and is a much smaller company than Nokia with little geographic strength outside of north America, while Nokia is a true global player.
IHS expects that once the deal has closed, Microsoft may reduce the emphasis of the new business on the low cost handset category where Nokia has released a series of strong handset in 2013 such as the USD20 Nokia 105. This will likely cause a further decline in Nokia’s overall handset shipments once the acquisition closes, most likely from 2014 onwards. However, IHS believes Microsoft has more to gain by keeping all parts of Nokia’s devices business running smoothly because it will grow Microsoft’s reach in low cost emerging markets that will be important for Microsoft long term.
Unless Microsoft can speed the pace of innovation with Windows Phone software, user experience and third party app quality, IHS does not expect any changes increase in its overall Windows Phone forecast. Any modest increase in Nokia’s Windows Phone smartphone shipments will be offset by the impact of Microsoft’s new vertical business model on the licensing of Windows Phone to other handset makers. As a result of the deal, IHS expects current Windows Phone licensees such as HTC, Samsung and Huawei, will wind down their use of Windows Phone in favour of alternative smartphone platforms.” — Ian Fogg, Analyst and Director Mobile & Telecoms at IHS telecom
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