Blog Post

Why I think the $7.2 billion Microsoft-Nokia deal is a terrible idea

Stay on Top of Enterprise Technology Trends

Get updates impacting your industry from our GigaOm Research Community
Join the Community!

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(s aapl), Google(s goog), Amazon(s amzn), Qualcomm(s qcom), and Samsung. In the loss column you can include Blackberry(s bbry), Palm(s HP), Microsoft(s msft) and Nokia(s nok).

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.

1200-nokia_stephen_elop_mwc_2013_keynote-6

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

1200-nokia_new_devices_mwc_2013-1

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

amazon-app-store-for-android

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.

[protected-iframe id=”d3b7a4ccde5d17bd45e96ec815d62a71-14960843-15759885″ info=”http://player.bunnycast.com?narrationId=29&color=FF9900&font-family=Arial%2C+Helvetica%2C+sans-serif” width=”100%” height=”70px” frameborder=”0″ scrolling=”no”]

96 Responses to “Why I think the $7.2 billion Microsoft-Nokia deal is a terrible idea”

  1. Typical “lemming” like response. Each of the Microsoft devices were/are technically
    superior. Apple has always been overpriced…yet very “pretty” and well marketed. Further yet, it is always good to have a level of competition. Thanks to Microsoft, Apple was able to stay in the game.

  2. Excellent article. I completely agree with the comment about the missing magic, and today neither MS nor Nokia is bringing this magic into the deal! The only valid argument for the deal I see is the feature phone business, but that won’t pay off in the short term.

  3. Microsoft should have gone to its roots: software, and not try “to be like Apple”. Trying to be like Apple is not innovative and it will be extremely difficult to beat Apple and others competing with Apple, like Samsung. The reason being is that to be Apple, you must have a certain culture and mindset in the company that clearly Microsoft does not have and that it can take forever to try to obtain. Instead, they should have stayed in the mindset that they already know, Software, and look for opportunities there. Ironically, HP, mainly a hardware company, tried to move deeply into software with the acquisition of Autonomy, with the results that we already know. The internal HP mentality just could not embrace Autonomy and the software business and soon most Autonomy employees left. Microsoft already had the mindset for software and they should have leveraged this key advantage. Microsoft then is playing to its weaknesses, not its strengths. Usually, this is a recipe for failure.
    One first step in the right direction would be to release ASAP true Office apps for both iOS and Android. There are many, many millions to be made here. They have to do it before it is too late and other office-like apps become standard in these platforms.

  4. fredhstein

    Great points and adding:

    There already is a 3rd option – Chrome, which may play fake to evolve from tablet to phone. And as you point out Android is a three headed beast addressing all segments and price points, including with Sony and Samsung camera options, the one area that Nokia hoped to gain with 14 megapixels.

    One has to ask. Has MSFT learned nothing from Ballmer’s reign of acquisitions. The big acquisition approach is a bad idea. ($24B approx in large acquisitions and tons of smaller ones with Ballmer as CEO – got them what?) This merger is like two desperate lonely and ugly people hooking up when the bar closes at 2am. Heck they could study HP to get an even better case for not doing acquisitions.

    The acquisition strategy merits a click thru. A franchise (Windows/Office, or HP’s Ink cartridges) creates a false sense of security to make big acquisitions to achieve growth and beat the “innovator’s dilemma” which should really be called the incumbent’s dilemma. But this trick must be used sparingly with great due diligence. There are many hidden costs. But the very worst is that the acquirer can almost never manage a large acquisition – too much complexity and well-entrenched cronyism even if the vast majority of the people are brilliant and of the utmost character.

    Together they will have $21B in goodwill in the new balance sheet – a write down is coming – easy prophecy.

    But the worst: MSFT will likely neglect their cloud offering – the leader in that group could make the best CEO. Someone who can “think different”. And to protect their hardware biz, neglect Office for iOS.

  5. It is very easy to criticize every move of Microsoft these days. only time will tell. The acquisition is inline with their strategy and its better late than never. If not this deal, can the Author tell/think of any other ways to save the Windows phone ecosystem ?. There is no magic in Windows phones but it is far better than Android security flaws and fragmentation.

  6. so you’re a seer now?hahahah last year everyone bashed the MS mobile OS for being an under achiever at 4th position, and let’s look at what happened?sales and marketshare rose ’til it was in 3rd position!!no one wants it?yeah, we can clearly see that people don’t want a Windows Phone.

  7. Nokia is skilled at marketing low-end cell phones in poorer countries. If Microsoft can get the hardware costs down–and hardware costs are always coming down–they could take over the smart phone market in developing countries.

    Who knows! Cell phones as computers might do remarkably well in countries where most people can’t afford either a computer or a tablet.

    • ashok pai

      yeah, but Nokia is losing that market as well in key markets like India. There’s a reason they have flagship phones that are aspirational, driving sales of the lower end as a rub off. Nokia lost its way trying to build their entire business off windows phone. nokia did do well with their low end WP phones – but that was only after steep discounts , and the fact that low end androids were not yet there in that price range. this year – there’s a huge change with mediatek based phones sweeping the indian market. tough times ahead for microsoft/ nokia

  8. Girish Warrier

    In all of the things going wrong at MS, why does the Xbox do so well? Isn’t it? What went right in that division and could that not be replicated?
    Whoever got Xbox where it is should be running the overall strategy, no?

  9. Michael Palmeter

    The path forward is often chosen based on goals (where do we want to go?) and obstacles (where can I go?). Those are both reasonable considerations, and it is a widely appreciated business strategy to “shake things up” – I’ve done it, and most of us agree that there are times when it makes sense. I suspect that this is one of those times for both Microsoft and Nokia. The union will, at the very least, eliminate barriers to closer technical and go-to-market cooperation. While it will no doubt alienate some parts of the ecosystems both vendors have built, it isn’t clear that those ecosystems can be maintained in their current forma anyhow – this will, at worst, accelerate the inevitable. I wouldn’t bet that this hook-up is a stroke of genius that will solve all problems for Microsoft, but I’m not betting that it’s a bad move either.

  10. What’s good about the article is it’s un-ambiguity. What’s not so good (or not so founded) is the pessimism.

    Granted that the buy out of Nokia might not make a killing in the market overnight, but there is hardly a better option. Should Microsoft have used their dollars to buy some other handset maker? Should Nokia have divorced Windows and gotten into the Android party? Frankly, none of that makes sense.

    On the other hand, the windows 8 Phones are not bad at all. Yes, everyone and her grandma has android devices aplenty, but these devices are not immortal. Far from it. Your shiny new Sammy Android toy will look vintage in a year. And in 2 years, you will need necrophilia to make you want to carry one around. So the key question to ask is not what phone OS you now have – but what will you have in 2 years.

    Because, in that time, Microsoft could get lucky or smart…Their technology is now finally looking good. Their rivals are hardly innovating. The initial euphoria of millions of apps is making way to a handful few which are present on all platforms – thus the platform is not a differentiator. The tablet market is under-served (iPad hardly has a worthy rival) while the PC/laptop market is ripe for a transformation…and if anyone it is Microsoft that is best placed to dance with the prom queen.

    Yes Nokia played the price game to gain some market share. But hey can anyone explain the pricing for Nexus 4? That amazing device costs a third less than comparable rivals – the Lumia 920 and 820, the Galaxy S4, the top-end HTCs or Sony etc…(No, I cannot even mention iPhone in the same sentence as Nexus).

    When Google offers popular Nexus devices for peanuts, or manufactures a mere handful of motorola phones, somehow that is considered cool/strategic. When Microsoft does something similar, it is a sign of desperation..c’mon, the elephant in the room is Samsung and everyone else is playing the same game of survival….

    My own prediction is: Microsoft will claw it’s way back to a respectable 20% market share in 2 years. Google will lick their korean inflicted wounds while still printing dollars, and Apple will carve out and stay put in their niche. What Windows, Unixes and Macs were to the PC world, Android, Windows and iOS are to mobile.

    • ashok pai

      “My own prediction is: Microsoft will claw it’s way back to a respectable 20% market share in 2 years. ”
      they said that 2 years back. they said wp7 will change everything, then they said “mango, and then ” tango” and then 8. now they say 9 will usher FHD and nokia in fold today. so who knows what will happen in another 2 years ?

      personally, I got fed up of lack of apps / services for symbian, and I went through this phase of wait until the platform has more developers. it’s the same with WP – it has the worst of both ios/ android platform. it’s proprietary/ closed and it’s got no developer traction

  11. As always, Om is negative on Microsoft. What a surprise!

    Om, what were you expecting them to do? Start building Android phones? Evaporate from the consumer space and just stick to Enterprise? Get real man!

    They are profitable. They are getting into the market at a reasonable cost. They last series of acquisitions have been right inline with their strategy. Skype, Yammer, for example are services. Kinect and Nokia are devices.

    They’ve recognized that the future of their cash cows (office and windows) is to become services and maybe devices somehow (like conferencing equipment maybe).

    They are not Google (thank God for that), and they are not Apple (We don’t need yet another religion in IT). They’ve embraced the cloud. They are competing with Amazon on AWS. Azure offers Linux right along side Windows servers.

    Windows Phone specifically is growing steadily. Market share without a plan to become profitable at some point is not sustainable. Amazon producing yet another Kindle like device is great. I think it’s clear Windows Phone is not only taking small market share away from Apple and Android but it’s also been able to accomplish what those 2 couldn’t and that’s drive the dumbphone to smartphone transition.

    What more do you want from Microsoft?

    • ashok pai

      “What more do you want from Microsoft?”
      curl up and die.lol.

      for the convicted monopolists they are, they were pretty successfully sending elop to do a hit job on nokia! man, in the panteons of corporate raiders , elop’s name will shine the brightest for how he took down a company the size of nokia and sold it for less than the size of a piece of software like skype. amazing!

      • Ashok in business if you’re not trying to dominate your competition then you’re not in business.

        Please stop with this monopolist crap. Apple has a monopoly on its products. Google has a monopoly on its own products. Please grow up and apply a 2013 lense to a 2013 discussion.

        What the DOJ penalized Microsoft for in the 90s no longer applies. You calling them a monopoly says you’re stuck in the past.

        They’re a business just like any other and a very successful one. Please respect the thousands of people who pour their blood sweat and tears into making the products that Microsoft produces.

        Google has a monopoly on the digital ad business. Yes there are a lot of competitors but Google takes an obscene amount of money out of every online/mobile ad dollar. Even Microsoft tried to enter that space and failed. Now Facebook is giving it a run. Why do you think Ms. Mayer is over at Yahoo? Yahoo till today is still the second largest digital ad entity on the planet. May not be making money, but if anyone has the ingredients to take on Google, those ingredients are over at Yahoo. Just wrong leadership so far…

        So please enough with this crap about Microsoft being a monopoly. When Sun cried to the DOJ they were pushing SPARC stations that started at 10x the cost of an average PC. Let’s get real here…

        It’s 2013. Use a 2013 lens to look at the facts please.

  12. Stephen Elop from Microsoft goes to Nokia to be made its CEO. Microsoft now buys Nokia & Stephen re-joins MS.

    Brilliant plan well executed! He was a Trojan horse sent by Microsoft to destroy Nokia!
    So that Microsoft could buy a sick unit at a much lesser price!

  13. Mitch Weiss

    One key way of looking at this is that MSFT was able to use their Non-US cash hoard for the purchase. That gives them approximately a 30% discount after you take taxes into account.

  14. I’m sure many feel like you, given the price action on MSFT today. I’m just not one of them. Being a hands-off software company may have worked 30 years ago, it won’t work today. Droid and Window mobile have no chance of becoming a decent platform as long as the approach is to hand it off.

    A good product starts and end with the hardware not the software. That’s why Apple killing these guys. Have you noticed, only Samsung is profitable with the Android platform. Why do you suppose? A very close partnership with google to build a device that somewhat integrated.

    In the long-run Microsoft will introduce many (emerging market) to their window products (like google did with android platform) and will resolve some of the clunkiness of the widow mobile platform.

    This is not a bad think for Microsoft…. Time will tell….

  15. “In theory, Microsoft is getting a great engineering team, a great product design team and a great brand (well, better than Windows Phone)”

    Only if you mean Asha and Lumia, since the Nokia name is not part of the deal.

    • Microsoft has an exclusive on the name Nokia until 2016 on mobile products. They also can continue to use the name Nokia on mobile product until 2023. Exclusivity runs out after 2016.

  16. Legitimate opinion, although it’s obvious that the author doesn’t like too much Microsoft, Blackberry and Apple while he favors Android. I think it’s sad for Nokia, one of the telecommunications heroes of the 90s. But, I think Microsoft and Nokia will succeed in this game. Microsoft will integrate die Nokia hardware into their cross-device “Surface” concept (PCs, tablets, phones, furniture), which could be interesting. I think, Microsoft “Surface” will be the third option and the fourth option will be Blackberry together with another player, why not Facebook or yahoo?

  17. Nicholas Paredes

    Nokia/Navteq is the only company that has the data to drive a car. They have test cars rolling about. $7B may not be the best price for this data, but it is worth half of that to somebody. I can’t believe that Apple didn’t buy them.

    • ashok pai

      “Nokia/Navteq is the only company that has the data to drive a car. ‘
      and we have google cars that drive by themselves!!!

      you’ve gotta be kidding. navteq is an old world company. google has been doubling in size every quarter. their maps has gone from being poor version of nokia maps to a comfortable competitor. pretty soon, they’ll beat navteq

  18. Jerome AF

    they won’t get to use the Nokia brand for their phones, the deal only includes the Lumia and Asha brands. Good luck with another huge marketing budget to convince consumers MS is a phone company….

    the forked andriod being no.3 situation is interesting, it’s not ideal for google, but still it helps take marketshare from Apple, their original fear was a Apple monopoly that locked them out, I guess it’s not a bad situation for them.

  19. Malik, do you know that “the market” is not just the US anymore? Do you know India? The rest of the world, where WP is groinwg very fast, do you know that it also is “market”?