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

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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(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.

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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.

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

  1. Samarth Singh

    I have owned and I own Nokia 6670, N91, N8, 808 Pureview.

    I believe Nokia has changed by a huge margin. No more Nokia for me now… I liked how Symbian was improving and catching up, even in 2012. But the Trojan Horse killed Symbian and MeeGo.

    It was nice being a customer of Nokia.

  2. Joshua Paul Boram

    Agree. Agree. Agree. I can’t agree more!

    Microsoft will fail. Its destined. Why would they take a perfectly good company and reputation, then throw it away for 7.1B? That won’t ever make sense in my mind. Because Microsoft isn’t in a place where they should be eliminating competition in any way. They also don’t know the mobile-phone playground as well. Now as reported here – http://VaultFeed.com/nokia-mobile-and-microsofts-new-project/ – Newkia is coming with a comeback from previous employees! craziness… thats all!

  3. samvitraina

    Good article and good points @Om. However, one point that you neglect to mention is that both these companies has no choice but to do this. Symbian wasn’t killed by Elop. It was killed by Android and iPhone. MS needs mobile as a core element of their strategy. All in all Windows Phone is a good OS and many would agree if it wasn’t named ‘windows’. So maybe this may work out in the end and have Microsoft the 3rd place in the mobile OS game.

  4. Microsoft buying Nokia is risky. I say this because it reminds me of HP buying first Compaq and then Palm. It didn’t work out well. These large companies with thousands of employees and corporate cultures do not mesh easily. It takes time and desire on all sides to get the new enlarged (engorged?) company to be it’s own beast.
    I hope Microsoft goes on but really I think it will calve off smaller companies like a glacier. The “iceberg” companies would be more nimble, hopefully.
    (All this iceberg talk is making me think of the Titanic, subconscious?)
    -Carrie

  5. IGnatius T Foobar

    The inevitable massive exodus of engineering talent from Nokia will cause some interesting things to happen in mobile. Microsoft keeps talking about “innovation” and “experience” but what they really have is a mobile operating system that *everyone* hates. Microsoft has already lost in mobile. Historically they manage to get something usable out by the third try, but in mobile they’re on try number eight now, and it’s still utter garbage.

    Face it, Microsoft: no one wants your crappy phones, even if you force desktop users to have an “experience” that looks like your crappy phones.

  6. Pradyumna Ingle

    Thanks for the link, the dialogue made me laugh, “ two turkeys don’t make an eagle. “
    MS has already tried their hands in production of handsets, but they never touched to the reality.
    since Google has already integrated all its services on a single platform, observing the me-too trend, that is well expected from MS. In fact they have much to offer when it comes to services. Like enterprise cloud services.
    MS has some good patents on Kinects, and Nokia has always dreamed of providing compact SLRs on their phones. It will be of no surprise to see Kinect like things getting used on their phones. Sir, Gaming and virtual reality can be best expected from this combo. MS certainly has power to do so.
    The questions remains are, like Apple, will MS use this Duo combo and their patents effectively, or Nokia will be made sink to near death like Motorola like by their new master( well, maybe they were already dead when they were taken over, and their master never did care for it)? Will MS keep this ecosystem excessively limited to its own arsenal or other OEMs like Samsung and HTC will still use it for their devices ( that will be hazardous if they are looking forward to pull down Samsung from the market)?

    well, but since now the 3 top most IT Product giants will compete for the same product based market share with equal potential, technology can be best expected to serve the users.

    Let’s see what happens next.