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Flash News,Does
MS-Nokia
deal make
sense?
Executive SummaryMicrosoft announced yesterday that it will be acquiring Nokia's devices and services division.
Microsoft will pay 3.79bn for Nokia's devices and an additional 1.65bn for the rights to Nokia's
patents (which remain Nokias property). Its a bold move that confirms the software company's
intention to compete with Apple and Google duopoly as a "devices and services" player.
As part of the deal, a total of 32,000 Nokia staff and the CEO Stephen Elop will join Microsoft, Elop
will be rejoining Microsoft after leaving the company in September 2010. Nokia will also receive
1.5bn of "immediate financing.
Nokia was the dominant player in the feature phone market but missed the transition to
smartphones. It was surpassed first by Apple and later by Samsung and companies using Google's
Android OS. Today, Microsoft is acquiring a struggling company with huge financial difficulties and
troubles in maintaining its business in mature markets. Nevertheless, there are signs that this move
could make business sense:
Nokias flagship smartphones are registering encouraging results, especially in emerging
markets. Windows Mobile OS is gaining market share at the expense of RIMs Blackberry.
Nokia devices still have potential to penetrate the market, even if it will be hard to break into
the Android-iOS dominated market head-on as the 3
rd
major alternative.
This acquisition could fit well with Microsofts new Devices & Services reorganization
strategy: Nokias expertise on devices and the access to its patents could help MS to
effectively challenge Apple and Google with mid-to-high-end device and service propositions
targeting consumers and businesses.
Finally, Nokias strong position in emergent markets and its global distribution network
could give Microsoft a substantial competitive advantage in entering those strategic markets
with either mobile devices or others MS products and services
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Flash News by Greenwich Consulting | Does MS-NOKIA deal make sense? 1
Microsoft is acquiring a struggling
company with huge financial difficulties
and weak position in mature markets
5.44bn to take over Nokias Devices & Services business
and license patents and other IP
Microsoft announced yesterday that it will be acquiring Nokia's Devices &
Services division. Microsoft will pay 3.79bn for Nokia's Devices and an
additional 1.65bn for the rights to Nokia's patents (which remain Nokias
property).
Nokia remains a struggling company in a weak financial
position and low gross margin on its devices business
In 2Q2013 Nokia shipped 53.7 million mobile phones1
, but despite improvedsmartphone shipment, the majority of volume was made up of feature
phones (46 million units). Due to Nokias focus on low to mid end
smartphones, they are experiencing a low gross margin level from its
device sales.
The chart below2 shows how Nokia is struggling to extract a sufficient level
of gross margin from its smartphones (especially with latest windows 8
Lumia devices)
What has Microsoft actually acquired?
The agreement still requires Nokia shareholders and regulators approval
but here are the main terms of agreement:
As part of the acquisition of Nokias Devices & Services division(for 3,79bn), a total of 32,000 Nokia staff will join Microsoft,
including 4,700 based in Finland.
Microsoft will pay an extra 1,65bn to access Nokias patents andother IP. Microsoft will also be granted the license to use Nokias
1http://www.forbes.com/sites/chrisversace/2013/08/22/watch-high-as-well-as-low-end-pressures-for-nokia/
2Company Data, GWC estimates
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Flash News by Greenwich Consulting | Does MS-NOKIA deal make sense? 2
HERE geospatial services in all its products. These IP assets are
the key element of the deal as they could be successfully
leveraged by MS and even beyond the phone/smartphone business
(Bing, Skype, Azure)
Stephen Elop, the current CEO of Nokia, will rejoin Microsoft,which he left in September 2010 to take over the Finnish company.
He is expected among the leading candidates to become the nextCEO of Microsoft, after the announcement at the end of August by
Steve Ballmer that he would retire within 12 months.
Microsoft will provide 1.5bn of "immediate financing" to Nokia,which reveals the critical financial situation of the Finnish
company, whose debt has already been reduced to "junk" status.
This acquisition complements
Microsofts new Devices & Services
reorganisation strategy; it makes
business sense for MS to acquire Nokia
Thanks to its partnership with Microsoft, Nokia devices
running Windows Phone OS have gained substantial market
share and have become the 3rd Mobile OS behind iOS and
Android
Nokia is on course to be the third name among major smartphone
manufacturers. The Lumia branded Windows Phone handsets are
progressively making Microsofts mobile OS the 3rdplayer behind Apples
iOS and Googles Android. This has been achieved at the expense of RIMs
Blackberry which continues to lose market share.
It seems that the strategy of high end flagship devices helping to sell mid
to low end devices is working. However, the enthusiasm for Windows
Phone platforms remains unevenly distributed: As we can see in the chart
below3, in Europe market shares are above 8% yet it remains extremelyhard for Windows Phone to penetrate other strategic markets such as
China and the US.
3Source : Kantar World Panel
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Flash News by Greenwich Consulting | Does MS-NOKIA deal make sense? 3
Smartphone OS Sales Share (%)
By solving Nokias cash problem Microsoft is tactically trying to maintain
this positive trend in Windows phones adoption: it tries to prevent the only
significant Windows Phone OEM4 from exiting the market or switching to
another OS provider. However, this alone will not change the sales of
Windows Phones and will require further investment in order to speed up
MS mobile OS adoption
Microsoft is transforming into a "devices and services"
company and Nokia could complement this reorganization
strategy: its expertise in devices and IP assets could help MS
to effectively challenge Apple and Google on this field.
In July 2013 Microsoft announced a reorganization of the company. The
company is planning to expand their offering of devices and services 5. The
goal is to provide an integrated multi-device experience (across tablets,
PCs, and smartphones) by fully leveraging Microsoft's assets. This is a very
substantial reorganization as until now MS staff worked in independent
and product centered teams.
The chart below sums up the vision Microsoft COO Kevin Turners vision of
what the company is set to become with this reorganization 6.
4Nokia Devices account for more than 80% of Windows Phone devices shipment:
http://blog.adduplex.com/2013/05/adduplex-windows-phone-statistics.html5
Press release - July 11th, 2013, Text of an internal email from Microsoft CEO Steve Ballmer to employees:
http://www.microsoft.com/en-us/news/Press/2013/Jul13/07-11OneMicrosoft.aspx6
Extract from a presentation held by Microsoft COO Kevin Turner during Bernstein Researchs Strategic
Decisions Conference (June 2013)
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Flash News by Greenwich Consulting | Does MS-NOKIA deal make sense? 4
In Microsofts new organization, all operating systems (Windows, Windows
Phone and Xbox) would belong to one organization, called OperatingSystems Engineering Group and all hardware (Surface and Xbox) to another
called Devices and Studios Engineering Group. Thus we think this acquisition
is coherent with Microsofts new organization, as Nokias expertise on
devices and its IP assets can be easily integrated and would help Microsoft
to effectively challenge Apple and Google by launching mid-to-high-end
devices and services propositions aiming both consumer and business.
Nokia's mapping and imaging services are recognized solutions by the
industry. Microsoft could offer this beyond its mobile devices and also
include them as add-on services for cloud solutions such as the Azure
platform. This will enable Microsoft to compete with Google in this field.
Azure services are also Microsoft's main asset to gain significant share in
the IaaS/PaaS market from Amazons AWS (with some substantial
advantages such as Bing, or Nokia mapping and geospatial assets)
Nokias strong position in emergent markets and its global
distribution network could give Microsoft a substantial
competitive advantage in entering those strategic markets
Microsoft Surface tablets and Xbox may have shown Microsoft the
importance of distribution channels to a hardware manufacturer. With the
Nokia acquisition, Microsoft will gain one of the largest and most efficient
distribution channels that they could leverage not only for mobile devices
but also all other Microsoft devices (tablets, Xbox etc.)
Moreover, Nokias strategic positioning in low to mid end handsets is
coherent with the forecast evolution for smartphone market: the chart
below7 shows that global smartphone penetration is expected to be driven
by the low-end segment.
7Source : Greenwich Consulting analysis and estimates based on OVUM & Strategy Analytics data, 2012
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Flash News by Greenwich Consulting | Does MS-NOKIA deal make sense? 5
Worldwide Smartphone shipments (million units)
Finally, the Finnish manufacturer has a very strong image in emerging
markets and its low to middle end strategy shows encouraging success.
The acquisition would allow Microsoft to successfully enter these markets
either with low to mid end smartphones or with other devices and services.
Experts are expecting emerging markets to be the main source of growthfor smartphone penetration in the coming years as we can see in the
forecast below8
2012-2017 forecast of Smartphone shipments and penetration rate in two main regions
8Source : Greenwich Consulting analysis and estimates based on OVUM & Strategy Analytics data, 2012
ConclusionAcquiring Nokia is a tactical move from Microsoft: It can be seen as an
attempt to maintain the positive adoption trends for the Windows Phone
by preventing the only significant Windows Phone OEM from exiting the
market or switching to another OS. But beyond the short term
considerations Microsoft is buying substantial and recognized IP assets
and device expertise which would fit well into its new Device &
Services oriented reorganization strategy. If successfully conducted
this merger could finally make Microsoft account among the most
important players in both devices and services markets.