Microsoft's Nokia Deal Is Smart - But It Probably Won't Succeed

Before you go, we thought you'd like these...
Before you go close icon
Sari Gustafsson/AFP/Getty ImagesMicrosoft CEO Steve Ballmer (left) shakes hands with Nokia's Chairman Risto Siilasmaa as they announce the sale of Nokia's phone unit.
By Henry Blodget

The Microsoft-Nokia deal is a smart deal for Nokia, which likely would have gone out of business without it. And, all things considered, it's probably also a smart deal for Microsoft, which is in an increasingly desperate position in mobile. It didn't cost much -- $7 billion of offshore cash, which is chump change for Microsoft -- and it gives Microsoft another and different (long)shot at trying build a successful mobile business.

But just because buying Nokia is a "smart" deal for Microsoft, this doesn't mean it has a good chance of success. It's smart in the same way that throwing a 'Hail Mary' pass is smart: It turns 100% odds of losing into, say, 95%.


Smartphones are the future, and Nokia is basically nowhere in smartphones. Nokia is still a big player in cheap feature-phone sales, but it's not even a top-5 player in smartphones. So the deal won't vault Microsoft into a leadership position in a business it wants to dominate. If Microsoft wants to continue to throw cash at this problem, it could also buy also-ran BlackBerry. But even then, the combined companies would have less than 10% of the global smartphone business.

Mobile is a platform business, and Microsoft's Windows Phone platform is basically nowhere. According to Comscore, Microsoft had only 3% of the global smartphone market in June. That was even smaller than BlackBerry. It was also up only 0.1% from the prior quarter. The smartphone game is dominated by Android (52%) and Apple (40%). All the advantages in a platform businesses accrue to the market-share leaders. Buying and unifying BlackBerry would help here, too, but, again, the combined companies would have less than 10% share.

Nokia's business and culture are entirely different than Microsoft's, and Nokia is massive. Nokia has 35,000 employees, 32,000 of whom are moving to Microsoft. Microsoft has 100,000 employees. So, "Nokians" will be fully a quarter of the new Microsoft. Hardware manufacturing and distribution, meanwhile, is a completely different business than enterprise and packaged software, and integrating cultures like this is famously difficult. And Nokia is headquartered in Finland.

Nokia doesn't (yet) make tablets, which are another big growth area. Microsoft (and Nokia) are already miles behind in the other big mobile business -- tablets. They won't help each other here.

Nokia and Microsoft are both losing money on their mobile businesses. Nokia sold about 25 million Windows-based smartphones last year. The company says it needs to sell about 50 million to break even. Android, meanwhile, sold 430 million units (ex China) and Apple sold about 140 million.

Becoming a hardware maker is a major change of strategy for Microsoft, and it will likely kill any remaining hope that Windows can become a ubiquitous smartphone platform like Android. Will other hardware manufactures make Windows phones now that Microsoft is aggressively and directly competing against them? Unlikely.
Sponsored Links
(There aren't many other hardware makers making successful Windows-based phones now, so this isn't a big loss. But it's a nail in the coffin of the traditional Windows strategy.)

The "low end of the smartphone market" is already well-served by Android and super-cheap smartphone makers in China and Korea. Nokia is still the second-largest handset maker worldwide because of its production of cheap feature-phones. Microsoft has said that it wants to go after the low end of the smartphone market -- feature phone owners who will buy smartphones -- and this segment is indeed where Microsoft has the best chance of success. But this market is already very well served. And even Nokia's manufacturing and distribution prowess will not likely be enough to derail the growth of Samsung, LG, Xiaomi, and other cheap smartphone manufacturers, all of which are already building Android phones.

Put all that together, and Microsoft-Nokia faces extraordinarily long odds of becoming a major player in the global mobile market.

All those who are bashing the deal, however, should remember that Microsoft's current mobile strategy would also have failed. And given that Microsoft seems committed to becoming a "devices and services company," an aggressive move like this makes sense.

(It's not necessarily a given that Microsoft should become a "devices" company. In fact, it would probably be better for the company to focus on its historical strengths -- software and services. But if you have decided that you are going to become a "devices" company, you might as well jump in with both feet. Time, after all, is a-wasting.)

So hats off to Ballmer & Co. for throwing the long ball. The pass will almost certainly fall incomplete. But when you're already losing and time is running out, it's better to throw the ball down field than get sacked in your own end zone.

More from Business Insider

America's Nine Most Damaged Brands
See Gallery
Microsoft's Nokia Deal Is Smart - But It Probably Won't Succeed

JPMorgan Chase & Co. (JPM) was for years considered the best-run bank in America, and its CEO, Jamie Dimon, the top banker. Dimon steered it through the financial crisis of 2008 in a way its competitors couldn't match. Unfortunately, JPMorgan is one more brand that was tarnished almost overnight. A single trader in JPMorgan's London office lost the bank $6.2 billion, and there are concerns the write-off process is not over. Dimon erred by saying the incident was isolated and based on management stupidity. The federal government did not accept that, and neither did investors.

The Office of the Comptroller of the Currency and the Federal Reserve made harsh assessments of the bank's risk management in January. Both agencies found "unsafe or unsound practices and violations of law or regulation." The criticism didn't end there. In March, the Office of the Comptroller downgraded JPMorgan's management rating. The reputation of the bank, almost entirely intertwined with Dimon, suffered one last blow. Investors have pushed to strip Dimon of his role as chairman, which has caused speculation that an incident that began in London could eventually cost him his job as CEO.

Research In Motion Ltd. (BBRY) announced earlier this year that it would rename itself after its most famous product -- the BlackBerry. New management has said that the BlackBerry Z10 and the redesigned operating system, which was delayed three times, are critical to turning around the business. But the product, which the company is betting on, is of only limited interest to the public. The BlackBerry brand already has been pressed to near extinction by competitors, including the Apple iPhone and Google Android OS smartphones, led by Samsung products. Apple's iPhone had about half of BlackBerry's market share in 2008, and Google Android was in its infancy. By the end of 2011, BlackBerry had less than 9% market share, Apple had almost 24%, and Android OS phones dominated with more than 50%.

In the history of smartphones, the 2013 launch of the BlackBerry Z10 may be only a footnote. The release was late, and most reviews have been mixed, at best. Early sales of the new device have been modest, and certainly not enough to dent the market share of Apple, which sold 47.8 million iPhones in its most recently released quarter. The Z10 was hardly the start of the downfall of the BlackBerry brand, but it may be the final chapter.

Shortly after launching in November 2008, Groupon Inc. (GRPN) began to revolutionize the coupon business. The company sent retail offers online to customers, which it targeted based on where they lived and worked, as well as their stated interests. Merchants and customers adopted the new model at a blazing pace, at least early on. Revenue increased from $3.3 million in the second quarter of 2009 to $644.7 million in the first quarter of 2011, the company reported.

When Groupon went public in November 2011, its trouble with the SEC about overstating revenue already had begun. Another SEC investigation caused the company to restate fourth-quarter 2011 revenue and drove down the share price 10%. In addition to accounting scandals, Groupon is having trouble fending off competition from peers LivingSocial, Amazon and brick-and-mortar retailers who do not want to be flanked by online coupon competition. After three years of hyper-expansion, Groupon forecasts 2013 revenue growth at a tepid 0% to 9%. Earlier this year, Groupon co-founder and CEO Andrew Mason was fired. Rejecting Google's $6 billion dollar offer (the company is now worth $4 billion), issues with the SEC and zero growth did not sit well with his board and co-founders after all.

If the stock market is any indication of the success of electronics retailer Best Buy Co. (BBY), it is worth remembering that its shares traded just below $49 nearly three years ago. Even after rallying since the start of the year, shares currently trade under $26. Best Buy has been its own worst enemy.

CEO Brian Dunn, who was charged with the company's turnaround, was fired in May 2012 for a relationship with a female employee. Founder and chairman Richard Schulze left under a dark cloud shortly thereafter when it was discovered he knew of the affair and did not tell the rest of the board. Then, last August, Schulze offered to take Best Buy private. Recently, he dropped the deal and rejoined the board. Even Schulze couldn't make the case that the company was healthy enough to be taken over, which raises the question of whether he believes the company he started has a dim future.

One of Best Buy's problems is that it has become the showroom for Inc. (AMZN). This was on display when it announced the financials for the quarter that ended on March 3, 2012. The company said that it had lost $1.7 billion, compared to a profit of $651 million the year before, and would close 50 stores. Best Buy also said that the critical marker of same-store sales had fallen, and that it expected the slide to continue.

The deterioration of one of America's oldest retailers has been going on for some time. In the five years before Ron Johnson's appointment in late 2011, J.C. Penney Co.'s (JCP) share price dropped 60% under CEO Myron "Mike" Ullman. Johnson embarked on an expensive turnaround plan, which included a new logo, advertising and the end of deep discounts, coupons and sales events once popular with customers. None of this appears to have worked. Total sales fell 24.8% last year to $13 billion, while same-store sales fell 25.2%. Internet sales, absolutely critical to retailers as e-commerce emerges as a primary source of revenue, dropped 33% during the year. The day after Johnson's dismissal, share prices hit a 12-year low.

Firing Johnson this week was the clearest repudiation of his turnaround strategy and the only sane decision by the board. According to recent reports, same-store sales dropped 10% in the quarter that just ended, likely contributing to his dismissal. Reinstating the former CEO responsible for the company's previous woes defies explanation.

The huge aerospace company has turned years of delays in the launch of its 787 Dreamliner into a nightmare for carriers. And passengers have become concerned whether the plane will be safe once it returns to service.

Major production delays began in 2007. The first passengers did not step aboard a 787 until an October 26, 2011, flight from Tokyo to Hong Kong - three and a half years later than initially planned. However, the events after that flight make the delays seem insignificant by comparison. Incidents of burning lithium-ion batteries caused the entire 787 fleet to be grounded. Despite further battery tests by Boeing Co. (BA) and regulators, the FAA has yet to allow the plane to go back into service. Ultimately, the 787 will be recertified, but the brand will be badly damaged for a very long time, at least in the eyes of the flying public. As the Los Angeles Times recently reported, "Boeing Co. is now battling on two fronts: fixing the source of the problem and regaining the trust of the flying public."

The South Korean vehicle maker and its stablemate Kia have been among the fastest growing car and light truck brands in America over the past decade. Hyundai's share of the U.S. market grew from about 2% in 2001 to more than 4% in 2011. During that period, Hyundai and Kia offered what Japanese companies had for decades -- high-quality vehicles at affordable prices. They burnished their images with a 100,000-mile warranty package dubbed "Hyundai Assurance." However, in November 2012, the EPA charged the companies with inflated gas-mileage claims, and they lowered the stated MPG ratings on many of their vehicles.

USA Today described Hyundai's reaction as "shocking." It said, "Hyundai, in a burst of hubris, deals with the issue by portraying itself as a consumer champion on its home page -- even though the reduction resulted from an Environmental Protection Agency investigation." More recently, Hyundai and Kia said they would recall approximately 1.9 million cars in the U.S. to "fix a potentially faulty brake light switch," Reuters reported.

Steve Jobs built Apple Inc. (AAPL) into a seemingly unassailable juggernaut -- and the world's most valuable public company. The reputation was carefully crafted for more than a decade by Jobs, who created entirely new product categories, and then dominated them with devices such as the iPod, iPhone and iPad. Apple's single most public disaster was its decision to dump rival Google Inc.'s (GOOG) Maps system and replace it with its own product. Following a huge wave of negative press, Apple CEO Tim Cook wrote a public letter apologizing for the mess and, at one point, even suggested users rely on Google Maps instead.

At the heart of Apple's brand decline is the simple fact that it has lost reputation as the prime innovator in the industries it once led. A year ago, no one could have imagined that a product like the Samsung Galaxy SIII would compete with the iPhone 5, or that the Galaxy S4 would be viewed as better than the iPhone. Apple lost its position as one of the world's top brands in a remarkably short time. It has not launched a revolutionary product in more than two years. For most companies, the launch of such a device once a decade would be sufficient. For Apple, it is nothing short of a failure.
Leave aside Stewart's five months in prison for lying about her sale of ImClone stock. Disregard her unbelievably high compensation as nonexecutive chairman of Martha Stewart Living Omnimedia Inc. (MSO) -- even as the company's revenue has consistently dropped, and its shares have plummeted more than 60% during the past five years, while the S&P 500 has jumped 20%.

The domestic diva and her namesake company have landed on the front pages again, this time in a legal battle between Macy's Inc. (M) and J.C. Penney Co. (JCP) about which retailer has the rights to sell Stewart-labeled products. Martha Stewart Living cut a deal with J.C. Penney in late 2011, giving the retailer the right to sell Stewart-branded goods in its store. At the same time, J.C. Penney also bought 16.6% of Stewart's company for $38.5 million. Macy's promptly sued, claiming that its exclusive rights to the Stewart product line, set in 2006, had been violated. The latest public blunder has further damaged a brand that began a downward trend years ago.
Read Full Story

People are Reading