Microsoft’s Nokia buy makes no sense but could just work

Wow. What a whirlwind twelve hours. Late yesterday, Microsoft and Nokia started a PR assault with the headline: “Microsoft to acquire Nokia’s devices & services business.”

I’ve got to admit, I was a little in shock. I had been saying last week that I believed Microsoft would need to purchase Nokia in the near future, but I didn’t expect it to happen so soon.

Well, here we are. Nokia, the once-great phone giant has succumb to Microsoft. An essential full-buyout of Nokia’s supply chain, distribution, manufacture, hardware design and patents. It’s hard to believe that Nokia, a company that made 12.7 Billion Euro a year just seven years ago is now lost to time.

I’ve spent the last twelve hours wondering why such a move is necessary. Microsoft and Nokia have long been in a strategic partnership, with Nokia dedicated to Windows Phone and eventually reaching a point where it controlled a large majority of all Windows Phone handsets. Why would Microsoft need to buy them when they had essentially been acquired without any money needing to change hands?

Nokia would do anything Microsoft said. They were quickly becoming Windows Phone. Nokia made beautiful hardware that consistently wowed the market. The Nokia brand was powerful.

Why exactly did they need to sell if they were doing so well and nobody had to pay anybody to make progress?

I’ve come to the conclusion that there were three major factors at play which triggered the sale:

1) Nokia was running out of runway.
2) Microsoft wants Stephen Elop back.
3) Microsoft will do anything to have a piece of the smartphone pie.

Nokia was running out of runway #

Despite the slow (but upward) growth, Nokia wasn’t actually making any money. For many quarters they have consistently posted losses despite strong sales. This couldn’t go on forever. Nokia might have had a lot of cash in the bank, but its runway wasn’t infinite. Windows Phone isn’t catching on fast enough.

Microsoft giving €1.5 billion in immediate financing to Nokia speaks to the financial issues I believe the company was in. If we look at Nokia’s cash on hand in 2012, they had €4.9 billion in cash, but they spent €2.1 billion in just one year alone.

The company was spiralling out of control quickly and needed an out. I doubt they could have lasted out 2014 without some sort of assistance, so Microsoft swooped in and saved the day.

I suspect, from Microsoft’s position, Nokia continuing to struggle despite their strong position would look bad for Windows Phone so they absorb a lot of the perception of the market by purchasing the company.

Microsoft wants Stephen Elop back #

The timing of this announcement was impeccable. Steve Ballmer announced to the market just a week ago that he was resigning as CEO effective 12 months from now.

Eight days later, Microsoft announces they’re purchasing Nokia in Q1 2014 and that Stephen Elop will be reporting to Steve Ballmer directly as head of devices. Oh, and by the way he’s now an “internal candidate” for CEO.

We could make educated guesses all day about this one, but it looks to me like Microsoft didn’t just acquire Nokia’s devices division, they also acquired a new CEO.

Steve Ballmer ousted almost everyone from Microsoft who could have been a real candidate for the job and it appears that he has essentially cleared the way for Elop to become the heir to the throne. Since Elop was a Microsoftie a few years back, it’ll be simple enough for him to slot back in seamlessly.

Microsoft wants to show how serious it is about smartphones #

The purchase isn’t just about saving Nokia. I believe this is also a show of power from Microsoft. They are declaring war on the smartphone and are declaring in perhaps the loudest way possible that they will go to any length to become a major player in the smartphone market.

The scale of the deal is immense, especially when you consider the amount of staff coming over to Microsoft. Nokia confirmed that it will be transferring some 32,000 employees around the world to Microsoft as the deal is completed.

To give some perspective, Microsoft’s estimated head count in 2013 was 99,000 globally. Year on year growth is around 4,500 employees globally.

With the Nokia purchase, Microsoft will breach 133,000 employees in 2014. An increase of 33% of total employees essentially overnight.

All of those employees are specialized in mobile devices, meaning almost a third of Microsoft are likely to be in some way working on mobile devices.

Additionally, I suspect that Nokia had begun to reconsider their strategic options due to their financial difficulty. I suspect they considered adding an Android handset to their lineup to see if that could help them regain some control.

Such a move would have damaged the Windows Phone brand if the company that is essentially the lifeblood of the platform were to release a handset running Android. If Nokia did release a non-Windows handset, it would have shown just how hard it is for Windows Phone to take any of the market and I don’t think Microsoft wanted that to happen. They wanted control.

The deal makes no sense but also makes total sense. #

With Microsoft at the helm and building their own handsets, the company has virtually unlimited runway. Microsoft can, as they often have in the past, throw money at the problem until something works.

I believe Nokia had just begun learning to find their niche in the smartphone market with low-cost smartphones that are easy to use. There are a lot of users out there that want to buy a smartphone instead of a candybar but don’t want to pay a premium for it.

Unfortunately, you’re pretty much stuck with Android if you don’t want to spend much, but Nokia had begun to see some success with lower cost phones such as the Lumia 520. Low cost Android phones are shit quality, confusing to use (especially considering the person who just likely purchased it really doesn’t care about smartphones) and generally slow. An all around bad experience and there’s nothing at the bottom of the market that really captivates consumers

The Lumia 520, with ridiculously low pricing poses a threat to that market. The 520 is a good all-rounder phone that’s simple to use and works well for the price. I believe this is the beginning of a focus to truly take smartphones to the masses, at low prices by Microsoft.

I’m not convinced that releasing phones with the Microsoft brand on them will have the same effect that a Nokia branded handset would, but perhaps Microsoft can take the smartphone world by storm from the bottom up.

And that’s what I think they’re going to do.