Microsoft Buying Nokia Changes Nothing

The big news late Monday night was that Microsoft decided to acquire Nokia's handset business, though it isn't particularly clear why.

First off, Nokia was already Microsoft's closest partner. The best Microsoft mobile phones are made by Nokia, and Nokia has already abandoned Meego and Symbian. Nokia was already all-in.

Microsoft clearly feels a need to be in the hardware business. This is odd because its $900 million write-off on Surface RT tablets was largely due to the software. Nokia does make great hardware, but its Windows alliance isn't helping sales. Analysts have predicted a terrible Q3 for Nokia.

While Microsoft feels a strategic need to be in phone hardware, it leaves it to Polycom, HP, and Aastra to manufacture its Lync phones. The sale of Lync phones is increasing while Nokia's sales are decreasing.

Nokia CEO Stephen Elop is a contender for the CEO position at Microsoft. Under the terms of the acquisition, Microsoft just hired him. But again, this changes nothing. He is just as eligible as he was before, potentially even less, as Microsoft now needs to closely manage its new division. Regardless, Elop will go where he pleases when he pleases.

Nokia and BlackBerry are in similar situations: Both missed the smartphone transition and both have tried unsuccessfully to correct. BlackBerry did it by building a decent operating system. The strategy was right, the timing was wrong. Nokia bet it all on Microsoft, which so far has not been a good bet. Microsoft could have paid a lot less for Nokia had it just waited another year. Of course that's been true for years, GigaOm reported Microsoft was trying to buy Nokia in 2011 for about $30 billion (it just agreed to pay $7.2 billion).

I was more bullish on Microsoft's mobile strategy in the spring. I felt that uniting the desktop and phone into a common platform made sense. Then I played with Windows 8. It's completely non-intuitive. But that's not the biggest problem.

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Read more of our coverage on Microsoft-Nokia, from Zeus Kerravala and Michael Finneran!
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The biggest problem is vision. Ballmer is a lame duck--likely to be replaced within 90 days. He is currently implementing his vision and strategy which includes doubling-down on mobility. The problem is, by the time this acquisition is done, the new CEO will be in-place and it is unlikely he/she will have the same vision.

I outlined a different scenario in a recent post. The new CEO could foster an anti-Apple partnership with Google. Microsoft gets out of search and Google gets out of Apps. They both agree on Android. Microsoft stops demanding fees from Android vendors, and Google stops charging Microsoft fees in the Play Store--or even better gives Microsoft its own enterprise-focused "Work" store. The validity of that specific scenario is irrelevant--it shows via one of many scenarios how quickly Nokia can become a liability to Microsoft.

So what exactly did Microsoft get that it didn't already have? Ah, the Nokia low-end brand called Asha. This is an area where Microsoft consistently fails. It's the next Zune and Kin in one.

Nokia did fine--the firm unloaded its sinking hardware division and now has cash to focus on its HERE (maps and location) service. Microsoft even agreed to license it for four years. With cash in-hand, a smaller more agile firm, and Microsoft promoting its services--Nokia is suddenly well positioned for re-invention.

Microsoft will be paying 3.79 billion Euros for the handset business and picks up 32,000 new employees, mostly based in Finland. Microsoft is also paying $2.8 billion for rights to Nokia Patents. AllThingsD reports that Nokia will grant Microsoft a 10-year non-exclusive license to its patents. Microsoft will license Nokia reciprocal rights to its location-based patents. Microsoft will have the option to extend the patent deal in perpetuity.

A few notes about the prices. First, Microsoft will be paying the Euros with offshore funds. This was the same approach taken with Skype because the US tax code discourages firms from bringing dollars home. Secondly, Microsoft is paying Nokia a total of $7.2 billion--that's pretty close to the $8 billion it paid for Skype. That's $15.2 billion in communications acquisitions.

Nokia plans to get approval for the sale in November.

Dave Michels is a Contributing Editor and Analyst at TalkingPointz.

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