Why Microsoft Shouldn't Buy Nokia

Why Microsoft Shouldn't Buy Nokia

Is a Microsoft led takeover of Nokia in the cards? Probably not--with the brightening future of Windows Phones, there's no longer a pressing need for Microsoft to buy the Finnish handset manufacturer.

No longer a pressing issue

There was a time months ago when such a deal made sense. Windows was a fledgling mobile operating system, mired in stagnation, and Nokia was the only partner truly dedicated to the platform. Microsoft needed to ensure that Nokia remained committed to Windows. Buying the company was the best way to ensure that.

But times have changed. According to Kantar Worldpanel, Windows is the fastest growing smartphone operating system. Over the last three quarters ended in April, Windows garnered 5.6% of U.S. smartphone sales, up from 3.8% in the previous year.

Windows is also popular among an important demographic--first time smartphone buyers. According to Kantar, of those that bought a Windows phone last year, 52% had switched from a feature phone. With over half of the U.S. market still feature phone owners and many of those expected to upgrade within the next year, Windows is the best positioned to capture that growth.

And while Nokia is the most important player in the Windows ecosystem today, expect Chinese manufacturers to drive the platform's growth over the long term. Microsoft already has relationships in place with Huawei and ZTE in mobile along with Lenovo as a major partner in the PC space. These allies will give Microsoft the scale needed to challenge Samsung's and Apple's dominance.

But, but, but!

Of course there's an obvious counter arguments to my points above. With Nokia accounting for four out of five Windows Phones sold, Microsoft's mobile success is still heavily tied to the company. Without Nokia, Microsoft's "bright prospects" would turn into a devastating downturn.

But while Microsoft needs Nokia, Nokia also needs Microsoft. Yes, Nokia could switch to Android, but doing so would create a scramble to build new software and services around these devices. Good luck trying to sell a bare bones Android handset for a premium price in today's market. Nokia could delay launching new products until the software is ready, but this would do nothing for Nokia's sales figures in the short term. And for all of this upheaval, would it really result in selling any more handsets?

Should an Android partnership develop, Microsoft might figure it's better off buying Nokia rather than seeing it split allegiances. But remember that CEO Stephen Elop has already discussed Android licensing once before and in the end decided that the cost of partnering with Google was too high. Nothing has changed from those original negotiations.

Proponents of the takeover also fear another player could swoop in. In June, the Financial Times reported that China's Huawei may be interested in using acquisitions to expand its mobile presence. Of course, Nokia would be the first candidate on Huawei's list but good luck getting such a deal past European regulators. Other players may decide to buy the Nokia's crumbling handset business. Today, however, there're no apparent suitors courting the company.

And if Microsoft were to acquire Nokia, it would be taking on a major headache. Microsoft would have to find a way to integrate the two businesses while simultaneously shedding thousands of employees. In addition, it would risk annoying other Windows manufacturers that might be unhappy about Microsoft making its own handsets.

Foolish bottom line

While the acquisition would secure Microsoft's strategic interests, those needs aren't as pressing today as they were a year ago. So unless the price tag comes down, why buy Nokia's cow when you can get the milk for free?

The article Why Microsoft Shouldn't Buy Nokia originally appeared on Fool.com.

Robert Baillieul has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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