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Why a Microsoft Takeover of Nokia Could Pay Off

Microsoft (s msft) has been on quite a spending spree of late, acquiring Skype and agreeing to spend about a billion dollars to place its Windows Phone platform on most new Nokia handsets. Recent reports have Microsoft looking to extend its binge next week by entering talks to acquire Nokia’s mobile business outright for a price tag that could be in the range of $30 billion.

That hefty amount of cash has led some to dismiss those rumblings as simply a weird rumor. To be sure, a Nokia(s nok) acquisition has its risks: The mobile handset market is already extremely competitive, and jumping into the manufacturing game could alienate Windows Phone partners like HTC and Samsung, which could mean that Microsoft’s future in mobile would hinge on such a deal. Nokia is also a company with an ingrained culture that’s slow to change, even by Microsoft’s standards, which could hold Microsoft back as the mobile markets continue accelerating. And Microsoft has been down this road before. It purchased Danger for $500 million and saw only the failed Microsoft Kin handset as the fruits of that labor.

But Windows Phone sales still appear to be sluggish, so while it would be a huge gamble for Redmond, there are several reasons to believe Microsoft might benefit by such a takeover. Here are a few:

  1. An acquisition opens the door for a Skype handset. Skype recently topped 145 million monthly users, and Skype Mobile has been downloaded by more than five million iPhone users (s aapl) alone. Meanwhile, carriers that once feared Wi-Fi calling — which is a key feature of Skype Mobile — are now beginning to embrace the technology as a way to offload traffic. Those trends could lay the groundwork for dramatic uptake of Skype usage on Wi-Fi for carriers that allow it.
  2. Nokia still makes great hardware. As my colleague Kevin C. Tofel noted last fall, Nokia makes great devices but has failed in recent years to produce mobile software and services that can compete in an increasingly crowded platform market. An acquisition would enable Microsoft to most fully reap the rewards of a marriage between Nokia’s top-notch gadgets and its own impressive new operating system.
  3. Ovi is a massive channel for distributing mobile content and services. Ovi services will already be integrated into Windows Phone 7 under terms of the existing tie-up, but Nokia plans to use the storefront to deliver apps for all its future smartphones. Acquiring Nokia’s mobile business could enable Microsoft to simply take over the Ovi Store (which is undergoing a name change), giving it outright control over the business.

Microsoft has seen little success in mobile data in recent years, and a botched takeover would likely mean the end of the company’s hopes to become a major player in the space. But it might be the only way for Microsoft to truly compete with Apple (s aapl) and Google (s goog) in the era of the superphone. For more thoughts on why such an acquisition could work, please see my weekly column at GigaOM Pro (subscription required).

Image courtesy Flickr user Jack Heff.

8 Responses to “Why a Microsoft Takeover of Nokia Could Pay Off”

  1. It’s much more likely that Microsoft will buy a hefty share from Nokia just as it did with Facebook and Apple. Fits with their MO. A complete M&A would be just crazy. But things are getting so hot in the mobile space that it might just happen.

  2. Sally F

    I’ve never seen a compelling reason why Nokia + WP7 would work.

    It won’t. The deal will fail.

    Nokia’s vast channel won’t help. If there was a desired product, yes, wide distribution would help. But Windows Phone is a product that the public has already rejected (see Gartner figures from today, putting Windows Phone at a paltry 1.6m units sold per quarter).

    What we have is a failed operating system in Windows Phone 7. Look at those figures. It’s already a dead duck OS. It’ll be entertaining to watch Microsoft try to swallow Nokia.

  3. Mike Reilly

    All MS needs to do to win is 1) Put their good inking and text recognition software on the WP, and 2) put N-Trig on all the WP phones & tablets, and Wacom on all the PC tablets and desktops.
    Two extras: 3) An extra would be if WP could truly read/write to lite versions of MS’s major software. 4 An extra would be if WP could fully integrate with Windows: I would take notes and sketches in the field or class, and bring them over easily to Windows when I link to the computer or the cloud. WP and Windows software should both be on all PC tablets and desktops. WP should be an overlay over all PC tablets.
    MS should utilizee used it’s Windows strengths, not omit them from WP.

  4. Colin, your conclusion is sound; your reasoning is a little off.

    Microsoft’s WP7 strategy is to marry the uniformity and ease of update of the iPhone with hardware from multiple manufacturers. The concept, in effect taking the best from Apple and Google, is a good one, assuming that it can be realized. The assumptions:

    1. Microsoft can keep the manufacturer’s in line. Increasingly manufacturer’s like HTC, Samsung, LG, and Nokia what to emulate Apple and become brands themselves. Nokia said as much. The key is product differentiation and will be increasingly difficult for Microsoft to suppress going forward.

    2. Microsoft can update user’s phones as easily as it updates it’s desktop operating systems. If the NoDo update is any indication, Microsoft has yet to prove it can do this routinely. A minor memory change caused the update to fail for many Samsung Focus owners for instance, and it has taken months for the update to roll out to everyone. That fact that carriers are involved only complicates matters.

    The first assumption argues against a Microsoft buyout of Nokia because Microsoft needs its manufacturing partners more than they need Microsoft. With the exception of Nokia, each has a better selling alternative OS, Android.

    Here’s where it get’s interesting. What if WP7 phones aren’t selling well, dismally in fact? Remember that WP7 phones have been on sale for months now and there are still no reliable sales figures available; not a good sign. With no manufacturing ties worth saving, buying Nokia would give the company arguably the foremost non-Apple smartphone design, manufacturing. distribution infrastructure in the world. Microsoft could still license WP7 to other manufactures but the ground rules would change improving Microsoft’s position. The carriers would still be a problem in any event.

    Of course, this assumes WP7 sales are bad. If WP7 market share is showing significant improvement, a Nokia Buyout won’t happen.

    As for the Skype buyout, most investors are still scratching their heads about that one. Why vastly overpay for a company where a formal strategic partnership would have accomplished the same thing?

    • Colin Gibbs

      Thanks for the comments, Ray; you make some good points. And you’re right that if WP7 sales are solid, MSFT has little reason to acquire NOK. But that certainly doesn’t seem to be the case.

  5. Backing up a false rumor with another false rumor by the same guy? If anything the lack of credibility of MS buying a $30B company should clue you in that the original claims of knowledge of WP7 sales were just as silly.

    Buying Nokia would be idiotic. Microsoft is not a hardware company and shouldn’t try to be one. Buying Nokia would turn Windows Phone into another iPhone or Blackberry, leaving Android as the only OS that runs on OEM hardware.

    Nokia has already pledged exclusive support to Windows Phone, so what are the gains of buying Nokia?

    • Colin Gibbs

      The Russian blogger who first reported this story actually has a pretty good record when it comes to reporting Nokia’s plans. And as I discuss in the piece at GigaOM Pro, while hardware may not be Microsoft’s core business the company has done pretty well with its Xbox line.

  6. Compared to $8.5B for Skype, paying $30B for Nokia seems like a bargain. At least Nokia earns a profit and has a viable business model, if they would just have competitive software on their hardware (which, I agree, is very good). A Nokia run right could generate $3B in annual profits, which would justify a $30B price tag, but there is no way that Skype will ever generate hundreds of millions of dollars in profits. OK, maybe not no way, but not by giving away peer to peer software and charging for connections to the public switched network.