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Summary:

Microsoft is paying about $7.2 billion for Nokia’s devices business and patent licenses in a last ditch gamble to take on Google, Apple and a wide variety of smartphone players who have surged ahead and threaten to gnaw at its core PC business.

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In 2007, when Apple launched its iPhone, a few saw it for what it was — an assault on business as usual in the telecom industry. It helped shift the focus from voice to data. It turned the phone into an anywhere computing device. The arrival of Android only added fuel to the fire — telephony of the past was no more, instead it became a game of software and services.

Steve Jobs with iphoneIn case of Google, many of those services come from within. For Apple, those services eventually took the shape of third-party applications (or apps as we call them now.) Six years later, what we have is a world that’s remarkably different — the erstwhile leaders have fallen on hard-times. New giants have taken center stage in an industry that still finds itself in continuous flux.

On the winning side of the equation thus far — Apple, Google, Amazon, Qualcomm, and Samsung. In the loss column you can include Blackberry, Palm, Microsoft and Nokia.

Today, Nokia announced that Microsoft will buy its devices business for shade over $7.15 billion in an attempt to mimic the Apple/Google strategy of owning the hardware, software and services. The reports of this possible merger had emerged as early as June 2013, according to the Wall Street Journal.

Fly like an eagle, fall like a turkey

Some will argue that the deal is good for both companies — after all, the number three spot in the mobile OS is still up for grabs. I am not one of those. Although Microsoft is still printing money and can afford a multi-billion dollar gamble, what if this doesn’t work out? Can it afford to fritter away a few more years on chasing shadows? There is nothing in the deal than inspires confidence that it will turn two also-rans into champions.

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Vic Gundotra, Google’s sharp-elbowed senior executive who, like Android co-creator Andy Rubin, wanted to win over Nokia and bring it into the Android camp about two years ago, put it best when he tweeted: “Two turkeys don’t make an Eagle.” And while he might have ruffled some feathers in Microsoft and Nokia offices, his observation wasn’t that off the mark. Microsoft makes a mobile OS, that the market doesn’t seem to want. Nokia smartphones sales make drying paint seem like a John Woo thriller. It doesn’t matter from which angle you look, the combination of these two companies into a single entity doesn’t add up.

Stephen Elop’s tenure as the chief executive of Nokia would at best earn him a B-minus grade, and that much because he inherited a company that was spiraling down before he showed up. The “bet the farm on Windows Phone move” however was all him. Since taking over the reins at Nokia in 2010, Elop has seen smartphone sales shrink faster than a $5-dollar linen shirt.

If anything, Elop’s tenure at the top of Nokia will be remembered for the years when Nokia became irrelevant in the the mobile handset business. In a post, “The End of the (Nokia) Raj”, I hinted at a future of irrelevance for Nokia. The fall from grace came much sooner than even I thought. Elop is now being widely tipped to take over Microsoft as its next chief executive, replacing outgoing Microsoft CEO Steve Ballmer. Given his track record, if I were a Microsoft shareholder, I would have to pause and gulp hard before putting the future of the company in his hands.

You can’t buy the future in a bargain bin

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Microsoft might actually have gotten itself a bargain. It is paying about $5 billion for Nokia’s device business and will pay about $2 billion for licensing Nokia’s patents. In May 2011, there was talk of Microsoft buying Nokia’s mobile device business for $30 billion. The money saved is one thing, but the question that needs to be asked is: what has fundamentally changed with this deal?

If you ask me, nothing really has changed. There is a certain quiet desperation in Microsoft’s move. So far, there has been apathy for the Windows Phone operating system — it accounted for about 3.7 percent of the total smartphone shipments during the second quarter of 2013, according to market research firm IDC. There was only really one company that was building Microsoft phones, and that was Nokia. During the second quarter of 2013, Nokia sold a record 7.4 million Lumia smartphones — only after Nokia cut the average selling price by 20 percent.

Microsoft and Nokia are two sides of the same coin and now they are both under the same corporate umbrella. Buying Nokia and adding 32,000 new employees adds a further and deeper layer of complexity to a sprawling Microsoft that is trying to figure out who it is, and what it wants to be in the future. It can’t let go of the legacy past — Windows and Office still print money for the company — but its future path is littered with mines. The company essentially fired (though not in as many words) its chief executive officer.

Microsoft Debuts Upgrade To Windows 8 Operating System

Microsoft’s legacy as a PC monopoly holder made it incapable of handling the fast changing, rapidly shifting post-mobile world. And now for the next year Microsoft will be distracted by integrating the two companies — all at a time when Samsung will be releasing a barrage of new phones, Google will be improving on Moto X and Android and, lest anyone forget, Apple will have a trick or two up its sleeve. Oh, by the way, there is that other Seattle-based company: Amazon has been quietly working on its own phones and has plans to take on the current smartphone establishment. And they don’t even care about making a profit — they just want marketshare.

In theory, Microsoft is getting a great engineering team, a great product design team and a great brand (well, better than Windows Phone). However in reality what it is not getting are the intangibles. In the course of my seven odd years of reporting on Nokia, I have met many talented people and many of them had a lot of pride in working for the company. It was the shining achievement of Nokia and its engineering culture. Even when things got bad over past few years, many believed that Nokia had the talent to help things around. I made a few phone calls this evening, and all I hear is a sense of quiet despondency and loss of hope. Working for Microsoft isn’t working for Nokia, is a common refrain.

The Third Mobile Option

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There is a widely held belief in the wireless business that there will and should be a third option to Google and Apple. Indeed, for the longest time the arguments were made for Blackberry (LOL!) and then for Microsoft. Some talk about Firefox OS.

I ask the question: why can’t the third option actually be Android itself — and what I mean by that is the non-official, non-Google Android. Amazon already has forked Android. Chinese vendors are building their own flavor of Android. Samsung too wants to control its own destiny and build its own flavor of Android. Sure, they all have the same OS foundation, but eventually all these alternative-and-custom flavors of Android can all be the third option.

If there is one upside, then I do believe that this just might be the best thing to happen to Finland and the Finnish startup scene. A lot of the talent draining out of Nokia will look for new opportunities in their areas of expertise — radio engineering, manipulating sensors and embedded systems. If anything, this is Finland’s big opportunity to become the epicenter of the Internet of Things.

  1. Aniruddha Mallik Tuesday, September 3, 2013

    Microsoft has a pretty poor track record with devices (Zune, tablets, etc). The only thing which has done reasonably well is probably the XBox. And if you go by what it has done and continues to do to Skype, it doesn’t bode well for Windows Phone as an OS either. This is nothing but a last ditch effort to pull out a rabbit from the hat. But what Microsoft needs is some real magic triggered by disruptive innovation and not a magician’s illusion. Steve Jobs is often criticized for his “reality distortion”, but he backed it up with path-breaking devices and technologies. Microsoft has so far not done that with any device. Hoping Nokia will be the messiah is just wishful thinking.

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  2. Great article. Couldn’t agree more.

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  3. Predictably, the most anti-Microsoft and Apple-obsessed websites, like this one, are quick to air negative views on the latest MS news. :)

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    1. Predictably, yet another Microsoft shill crawls into the commenter crowd when the article is not to flattering of Microsoft, tries to defend and/or put a positive spin on the deal, and automatically attributes being anti-Microsoft as being pro-Apple.

      Just listen to yourself, Tim Acheson.

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  4. If the two software units (Microsoft’s and Nokia’s) now work more effectively together, under the same umbrella, as compared to being in two separate companies, the time to market for new smartphone innovations could significantly increase. That’s a reason to disagree with the analysis here. However, my “if” is a big “if” :-)
    For some background thinking, from March 2011 but still relevant, see http://dw2blog.com/2011/03/02/on-turkeys-and-eagles/

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    1. Hm, I don’t think you said what you wanted to say…

      Still, MS did not manage to make its own departments on the same campus work together. And now they will change the CEO, do the largest restructuring in their history, plus integrate another 32.000 highly irritated “foreigners”… and this will automatically and magically improve something? I would be astonished.

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  5. Microsoft don’t really have a strategy as such, other than making sure it — whatever “it” happens to be — is capable of running Windows.

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  6. Deal may be risky but will help MS to reach to wider strata of developing economies, Brand-building….

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  7. Thanx for the great article, good to know.

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  8. So Stephen Elop steps down from Nokia (or whatever will be left of it) and goes back to Microsoft?

    Anyone else think that this deal is rather *personalised*….

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    1. It’s been “personalised” since “the burning platform” memo and move to WP.

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  9. At least Nokia shareholders will finally get closure, just not the way they hoped.

    I believe Nokia was being pressured to go Android and this Microsoft could not allow because it would have been the death of Windows Phone.

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  10. “At the start of every day I make myself three promises — I will limit the amount sugar I consume, have little or no salt and whatever I do, I will not let my preconceived notions come in the way of learning. I am successful about half the time, but rest of the time I am faced with my own limitations and weaknesses. A scone here, a little curry there, and of course, looking back into the past and making a snap judgement about something in the future”

    http://gigaom.com/2013/08/28/patterns-fallacies-why-they-have-no-place-in-my-silicon-valley/

    After reading this article, I’d not be surprised to know making snap judgments is your biggest weakness of all :)

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    1. “snap judgment”
      WTH ? people knew this right from feb11 when elop killed symbian and the play then on has been about killing nokia softly. every move by elop was designed for maximum microsoft benefit – closing down “unnecessary” divisions (unnecessary to microsoft). unless you were living under a rock – this was pretty much on course, and well discussed for 2 years since feb’ 11.

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    2. well said

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