Microsoft Had No Choice But To Buy Nokia’s Phone Business

Microsoft’s $7 billion purchase of Nokia, and the subsequent fallout, has been fascinating to watch.

It’s a measure of how quickly empires rise and fall that the shine of both Nokia and Microsoft’s stars are so dulled that a joining of the two is looked upon with disdain rather than the awe it would have been just a few years ago.

Yet when one breaks down the options that were on the table for both parties, it’s fair to say there were not a great deal of viable alternative plays.

Strongest hand on offer

The announcement of the deal was met with a flurry of skepticism and doom mongering from industry experts. Alongside the harsh words was an immediate 6 percent slump in Microsoft’s stock.

But there is a logic operating here that, given the current status of both companies, is hard to argue with.

For Nokia’s part it was a company in terminal decline, a former trailblazer long since left in the dust by upstarts like Apple. As John Gapper in the Financial Times highlighted, between 2000 and 2012 Nokia’s market capitalisation fell from $209bn to $14.3bn. In contrast, Apple’s shot up from $8.6bn to $627bn during the same period.

Already in bed with Microsoft as the main producer of its Windows Phone – and ruing the mistake it made in not going with Android when it had the chance – the Finnish firm had little choice but to accept the deal if it wished to survive.

Microsoft for its part wisely bided its time before making the purchase and got as good a deal as could be reasonably expected.

Indeed, when one considers that it cost Microsoft $8.5 billion to buy Skype in 2011, the Nokia deal seems a far shrewder move. Especially as it was made from offshore cash that could not be brought into the US without a substantial tax fee.

Reshuffling the pack

Microsoft has clearly decided that owning both hardware and software is the only way to compete and, faced with impending defeat in the smartphone arena, has taken this desperate step.

Microsoft owned a small – but apparently growing – share of the smartphone market. With Nokia now absorbed it will now hope to develop better, faster and with more focus than previously.

The question now is what is the plan?

Microsoft has the know-how, the acquired companies, the personnel and the distribution, but it needs to quickly start adding up to the sum of its parts.
But owning both hardware and software is one thing, bringing the two together harmoniously quite another.

Lacking the kudos of Apple or Google, Microsoft desperately needs to create and drive a vision that consumers can buy into and place themselves as a viable alternative.

As the launches of Windows 8, the Surface tablet and various Windows phones have shown, Microsoft’s PR and marketing machine has yet to convince us that it has the capability to do this.

Product and development wise, Microsoft must somehow position itself between iOS (closed and difficult for developers) and Android (open and messy).

Complicating things further still, many developers are already finding it easy to develop for two platforms simultaneously, and Windows is just a step too far. Bringing these developers on board will be vital.

Changing the dealer

With such a massive amount of structural, cosmetic and cultural change needed to revive Microsoft’s fortunes its unlikely Nokia’s CEO at the time of the deal, Stephen Elop, is the man to lead the charge.

A former Microsoft man and tipped by many to replace outgoing CEO Steve Ballmer, he has surely had a foot in both camps for so long now he is unlikely to be able to make the vast overhaul needed.

Microsoft has announced Elop will return to them (along with a £16 million personal bonus) but his position upon his return is currently unclear.

A new face with a new vision and the ability to steer a large, troubled ship with talented, but diverse crews is what is needed. An external appointment seems the best option. Elop may be able to help navigate, but he seems an unlikely captain.

The die is cast

Microsoft is in do or die mood when it comes to smartphones. The Nokia deal will be incredibly hard to make work, and it would take a brave or foolhardy gambler to bet any money on them pulling it off and knocking either Apple or Google off their perches.

But it was also the right play in the circumstances Microsoft found itself in. Had the company not acted, it would have equally been accused missing its chance to snap up Nokia.

Microsoft’s roll of the dice may not produce a pair of sixes, but it’s more than they could have hoped for if they’d stepped away from the table.

Andreas Bernstrom is the CEO of mobile voice over IP (VoIP) provider Rebtel. He has previously worked at Goldman Sachs, and TradeDoubler UK

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