Microsoft Acquires Most of Nokia

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Don’t you love it when major news stories break literally minutes after you go to bed?

That’s the sentiment of many today, as we wake up to find that Microsoft has acquired, well, just about everything that makes Nokia Nokia.

Late last night, Nokia announced via press release that the company had agreed to sell “substantially all” of the company’s Devices and Services business to Microsoft, whose Windows Phone software powers the majority of Nokia’s recent smartphones.

The deal is not quite fait accompli, as both companies expect it to close sometime within the first quarter of 2014. That’s due in large part to the fact that a deal this large will be subject to approval and endorsement by Nokia’s shareholders, as well as regulatory approvals in both Finland and the United States. 

The Redmond software giant made a point of announcing that the transaction would be funded by overseas cash reserves, the use of which several notable tech companies (namely Apple) have come under fire in both the press and the halls of Congress.

Nokia Lumia 1020Microsoft CEO Steve Ballmer was characteristically enthusiastic about the deal, announcing that it was “a bold step into the future – a win-win for employees, shareholders and consumers of both companies. Bringing these great teams together will accelerate Microsoft’s share and profits in phones, and strengthen the overall opportunities for both Microsoft and our partners across our entire family of devices and services.”

While Microsoft may be convinced of the idea, many analysts are nothing but. The company’s lackluster performance with its own tablet hardware, including a nearly $1 billion writedown, leave many wondering if Nokia’s burgeoning Lumia success can thrive under Microsoft’s bureaucracy.

In addition to the physical acquisitions, Microsoft will take various business and marketing units from Nokia, including 32,000 worldwide employees – 4,700 of which reside in Finland, and 18,300 of which are “directly involved” in manufacturing/assembly of Nokia devices. Nokia is also giving up their Qualcomm patent licensing agreement and a 10-year license to many, if not all, of the patents that the company holds.

Interestingly, Microsoft will become the direct owner of Nokia’s Asha featurephone brand, which sold more than fifty million units in the second quarter of 2013. Nokia is retaining rights and management of the Nokia brand, however, licensing it to Microsoft for use with “current Nokia mobile phone products.”

What that likely means, then, is that any new Lumia phones will either be branded as Microsoft Lumia, or perhaps even sold as “Windows Phones.” 

Despite the loss of a huge member of Finland’s technology sector, the country may be buoyed by Microsoft’s announcement that it has chosen it for the location of a massive new European data center – which includes an investment of $250 million.

If you’re wondering how Nokia can survive without the phones that made it famous, you might be surprised to learn that all of the parts that Microsoft is acquiring – including all of Nokia’s smartphone and featurephone divisions – were responsible for just under 50% of the company’s net sales for 2012. That means that Nokia will still have a huge base of revenue from which to fund its various investments and engineering efforts going forward.

Nokia’s CEO has stepped down to become EVP of their Devices division, with the Chairman of the Board coming in to serve as interim CEO. Outgoing CEO Stephen Elop will be joining Microsoft with a handful of other executives – a neat finish to the deal, as Elop came from Microsoft to Nokia in the first place (this will also cement conspiracists who argued that Elop was sent to Nokia from Microsoft to arrange such a deal).

The news comes on recent reports that show rapid growth for Microsoft’s still-nascent phone OS. While American sales continue to flag far behind Android and iOS, Windows Phone now enjoys more than 8% market share in Europe, representing one in ten smartphone sales in Britain, France, and Germany. 

In Mexico, that share jumps to nearly 12%.

Google and Apple have little to worry about, however, at least for now. Less than 30% of Windows Phone’s growth can be traced back to users switching from Android or iOS. Where Microsoft seems to be succeeding is in convincing featurephone buyers to upgrade to a smartphone for the first time. 

Much of that growth can be attributed to Nokia’s aggressive strategy of low-cost devices – the Lumia 521, which offers users a compact Windows Phone with a dual-core Snapdragon S4 processor, costs just $150 flat-out, with no contract.

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