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

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.
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(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.

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

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