Let's roll the clock back just a couple of weeks to August 23: The news coming out of Redmond was that Steve Ballmer would be stepping down as the CEO of Microsoft as soon as a replacement could be found. One of the candidates that I thought made sense was Nokia CEO Stephen Elop, who was hired away from Microsoft in 2010.
Well, that possibility just got a bit stronger as Mr. Elop and 32,000 other Nokia employees will become part of the Redmond machine as Microsoft shells out a cool $7.2 billion for "substantially all" of Nokia's devices and services business and licenses Nokia's patents and mapping services. The announcement puts to bed the speculation raised in June by the Wall Street Journal that Microsoft had made an offer to Nokia that never happened because the two parties couldn't agree on a price. I guess the parties finally agreed.
Interestingly, the $7.2 billion is still $1.3 billion less than what Microsoft paid to acquire Skype back in 2011, so big price tags certainly don't scare Microsoft.
This deal now gives Microsoft a fully integrated hardware and software product it can use to try and gain share on Apple and Android. If Microsoft was going to get into the hardware game, this deal makes all the sense in the world given the tight partnership that the two companies have had. Nokia had ditched the dying Symbian operating system in favor of Windows Phone years and ago and had hitched its success to Microsoft. Similarly, Microsoft had banked its success in the phone industry on Nokia since the announced, formal partnership back in 2011.
Despite the tight partnership though, the pair really hasn't made much headway in the mobile phone business, as Windows Phone has less than 5% share. I'm not convinced an integrated platform will make that much difference either.
For Microsoft to gain significant share on Apple and Android, two things have to happen. One is that Microsoft must somehow create something game changing, and the other is that Apple and Android must somehow miss that thing.
I've played with one of the Nokia phones running the new Windows Phone 8 and I will be the first to say, it's a great phone. I like the interface, audio quality and form factor of the device. However, it's not game changing. There are limited applications compared to Android and Apple and while the interface is great, it's not so different that it makes up for the lack of apps.
There are a couple of differentiators though: For gamers, the Xbox Live capabilities are certainly a draw and the high-quality camera (41 MP on the newest phone) is well above anything any other phone has. However, gamers have never been a great audience to market phones to (remember the NGage?) and if I'm really a photo buff, I'm likely to have a real camera that I use for all my photos instead of my phone.
I'm skeptical that the integrated platform will make that much difference competitively. Wasn't the Zune or the Surface supposed to have the same impact? This acquisition reminds me of the saying that you can't take two people with broken legs, tie them together and hope they learn to walk. There's really no evidence that Nokia in the hands of Microsoft is going to have any greater impact on the industry than Nokia being in the hands of Nokia.
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Read more of our coverage on Microsoft-Nokia, from Dave Michels and Michael Finneran!
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The deal though does make sense on a few financial fronts. Ahead of the joint call, Microsoft issued this 30 page slide deck to explain the purchase.
One of the points raised is that the acquisition is of a foreign company and Microsoft has lots of offshore cash, so there was no repatriation of cash required. This means Microsoft can continue to use its domestic cash to pay dividends and buy back stock, and fund the acquisition with its offshore money. If you've read my blogs on the repatriation issue, you know my opinion that this issue almost forces companies like Microsoft to look outside the US for big acquisitions.
The second point raised in the deck that I thought made some sense is that Microsoft can fuel R&D faster by having the two companies come together. Under the current partnership, Microsoft gets less than $10 in gross margin for every phone sold. Post acquisition, Microsoft will get over $40 per unit, meaning it will have more money to pour back into R&D to build a better mousetrap.
So for $7.2 billion, Microsoft acquired a bit of gross margin and now has an "integrated platform" to use as a competitive differentiator. However, as I said before, this is no guarantee of success. While Apple has been wildly successful with this model, BlackBerry hasn't found a way to rekindle their magic and even Nokia had an integrated platform with Symbian. In fact the Nokia-Symbian integrated story was so "successful" that the company ditched it to partner with a firm that never had any success in mobile.
To me, this seems like a Hail Mary, but I do live in Boston, the home of one of the most famous Hail Marys of all time (Doug Flutie versus "The U" for you non-football fans), so anything is possible. I just think it's unlikely.
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