Nokia Phones Drive Microsoft’s Reinvention

Announcement Highlights

• Nokia’s revenues and market share has suffered badly in competition with Apple and Samsung
• Microsoft agrees to buy Nokia’s mobile device division for $7.2B – too cheap in our view
• Included are 32k staff and the right to use associated patents for 10 years
• Nokia’s CEO Stephen Elop will rejoin Microsoft to head up the new division
• Nokia NSN will continue as a network supplier to Service Providers
• Adding devices and services to its software business is part of Microsoft’s reinvention strategy

Microsoft announced last night that it intends to purchase Nokia’s mobile phone business for $7.2 Billion. We thought we’d have a look at the 2 companies market positions and work out their chances of success. You’ll be interested in thinking about how the news will affect the market going forward.

Nokia’s Market Position

In addition to phone business it’s selling to Microsoft Nokia also sells network equipment. Having bought out Siemens in August, it will keep the NSN acronym by re-branding the business as ‘Nokia Solutions and Networks’. It has been building the business for some time acquiring the network assets and 6.8K staff from Motorola in 2011.
NSN made $16 Billion of Nokia’s $34 Billion revenues in the year to the end of June. We classify its offerings exclusively in the Service Provider area and place it I third position behind Huawei and Ericsson with a 13.5% market share for the year.
Nokia is in third position in the $291 Billion mobile phone market: but, with a 5.9% share it is a long way behind Samsung (34.9%) and Apple (30.4%) and even further behind in Smart Phones, where it reported sales of just 7.4 million in the last quarter.
It announced a partnership with Microsoft at the beginning of 2011, having jettisoned the 2.8k strong Symbian Professional development team to Accenture in 2009. At the time we argued that the partnership would have to be different and special to succeed and that collaboration would be a major challenge.
Nokia pioneered the mass market for mobile phones but missed the development of smart phones, relying more on the feature phones it has been so successful with. Its adoption of Microsoft Windows Phone has only been partially successful. We believe that horizontal integration gives vendors little benefit in the modern market – rather the quality of the app store, integration of key new features and a maniacal attention to the user’s experience drives the success of Samsung and Apple. Would that it was different but Nokia fell short. There appears to be no cache for a European mobile phone supplier on the world stage.
Roughly 58k of Nokia’s current 88k staff are in areas not affected by Microsoft’s acquisition.
See the Figure for Nokia’s falling revenues, its weak profits and falling mobile phone market position against Samsung and Apple. The Credit Crunch in 2008 created downward momentum from which it has failed to escape.

Microsoft’s Market Position

Microsoft also suffers from an over-dependence on horizontal market. It is attempting to diversify from decades of dominance in PC operating systems and office software applications. Revenues from Microsoft Business Division are now greater than any other and it has also improved the performance of the Entertainment and Devices division through adding Skype and smart phones to its existing xBox gaming business.
Microsoft launched its own Surface smart phones and tablets in 2012. At the time we argued that the move would change its relationship with its existing hardware OEMs and would find the massive logistics of the mobile phone market difficult to master. We even predicted that it would use its partnership with Nokia to push the new machine.
Microsoft is the world’s largest software supplier generating a 3.7% share of the $883 Billion market in the year to the end of June. It has a short lead over Oracle (3.1%) and IBM (2.8%). However its lack of hardware revenues pushes it down to fifth position in the overall IT market, which is headed by Samsung and Apple of course.
Yesterday’s announcement included the right to use Nokia patents for 10 years, which will help in the smart phone market full of actions and legal battles. It also includes the return of Nokia’s CEO Stephen Elop, head of Microsoft’s Business software division before moving to Nokia in 2010.

Some Conclusions – Politics And Price Concerns

CEO Steve Ballmer may be leaving as head of Microsoft in 12 months time, but his influence can clearly be seen in this move. It is the perfect addition to its reinvention strategy, which involves adding services and devices business to software. However we have some major concerns about the news:

• If $10.3 Billion was too much for HP to pay for Autonomy – the last big acquisition of a European IT supplier – surely the $7.2 Billion Microsoft plans to pay for Nokia’s phone business is too little. For comparison – Autonomy’s life long revenues were 1/3^rd of the acquisition price and it had around 2k employees, while Nokia’s phone business has revenues of over twice the acquisition cost and 32k employees.
• The loss of a major European phone supplier will also be a bitter blow for the EU, especially given its antagonism towards Microsoft in the past. Nokia’s business will suffer badly if anti-competitive investigations take anything like as long as the 18 months Oracle had to wait to buy Sun.
• Google’s acquired Motorola’s mobile phone business at the end of 2011, but has failed to compete successfully thus far. Microsoft will need to work hard to make its new mobile device business a success.

Despite these worries we’re convinced that the addition of this mass device division can help in its reinvention. Who knows – If it works quickly maybe Ballmer (like Manchester United’s Alex Ferguson in 2011) will delay his departure.