nokai and microsoft

7/29/2019 Nokai and Microsoft

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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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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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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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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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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.

nokai and microsoft

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