Few could be surprised by Microsoft's takeover of Nokia's mobile phone business. Since the two signed a partnership agreement in early 2011, Windows Phone has been growing slowly, but the platform is clearly gathering momentum, making it the right moment to accelerate. Nokia can now focus on its strongest assets: HERE, Nokia Solutions and Networks (formerly Nokia Siemens Networks) and developing technology.
Microsoft is paying in total EUR 5.44 billion for Nokia, including EUR 3.79 billion for the mobile phone activities (Devices & Services). The remaining EUR 1.65 billion is for licences on Nokia's patents.
Nokia already went through a major transformation as part of the cooperation with Microsoft. The Finnish management was replaced and former Microsoft executive Stephen Elop took over as CEO. Nokia was gradually forced to abandon its Symbian and MeeGo platforms and focus entirely on Windows for smartphones. In exchange it received USD 250 million in platform support each quarter from Microsoft in order to grow the Lumia smartphone business.
Two and a half years later, it's all starting to bear fruit. In Q2 2013, Windows Phone had a market share of 8.2 percent in the five largest European markets (Germany, France, Spain, UK, Italy), more than double the 4 percent a year ago, according to Kantar World Panel. Windows Phone is also gaining ground in the US, although at a slower rate. According to ComScore, the Microsoft platform has just over 3 percent of the US market.
Microsoft's expansion in the hardware market comes at a good moment. While two years ago Windows was still struggling against BlackBerry for the third place in the smartphone OS market, after Google's Android and Apple's iOS, BlackBerry is now in dire straits. Microsoft's takeover of the Nokia business should create synergies in order to better compete against market leaders Apple, Samsung and Google.
Nokia currently accounts for around 80 percent of Windows phones sold. The question is how much more can it contribute to Microsoft's mobile strategy? Nokia was already completely committed to Windows Phone.
Microsoft's acquisition of the Nokia business could be considered a rescue plan. Nokia was struggling financially to keep up with the spending by competitors such as Samsung on the mobile device market. For Microsoft, it needs to accelerate take-up of Windows Phone if it wants to remain a relevant player on the mobile software market. This is all the more important for the software giant as the contraction in the traditional PC market worsens in favour of tablets and other mobile devices.
Nokia and Microsoft have been in talks since early this year. The negotiations originally focused on changing their existing cooperation to create more value, rather than a direct takeover.
After the sale of Devices & Services, Nokia will have three strategic assets remaining: HERE, Nokia Solutions and Networks and 'advanced technology', its collection of patents and technology. Together these three are profitable and should ensure the continuity of the company. Nokia is likely to invest part of the proceeds from selling the phone business in further developing these assets.
- HERE: mapping of 190 countries. Not just navigation, but also cloud services for players like Amazon, Google and Yahoo!. Microsoft will also take a licence for HERE, making it one of the biggest customers. HERE generated revenues of EUR 233 million and a gross profit of EUR 177 million in Q2 2013. The net result was a loss of EUR 89 million.
- Nokia Solutions and Networks (NSN): Nokia agreed in July to buy out Siemens' stake in the company for EUR 1.7 billion, giving it 100 percent of the network equipment maker. NSN will increase its focus on mobile broadband, including LTE and 5G. The company generated revenues of EUR 2.7 billion and a net profit of EUR 8 million in the second quarter.
- Advanced technology: mobility and cloud technology. Nokia has said it wants to build on its patent portfolio and licensing. It has over 30,000 patents and applications, including around 1,000 patents essential to industry standards. It generates around USD 500 million per year from licensing the technology.
