Microsoft buys Nokia to make its own phones. Will they be that smart?

Microsoft chief Steve Ballmer is taking Nokia’s mobile business off the hands of its interim CEO, Risto Siilasmaa. AAP

In a move that was paradoxically as unexpected as it was inevitable, Finnish mobile phone company Nokia has sold its mobile phones business to Microsoft for US$7.2 billion. The deal comes at a time when Nokia continued to struggle to make headway with its Windows-based smartphones against Apple and Google’s Android. Nokia, which once commanded 40% of the market, now has less than 15% of the worldwide mobile phone market and less than 3% of the smartphone market.

In addition to the phones, the deal gives Microsoft a non-exclusive licence to Nokia’s patents for ten years.

Stephen Elop, Nokia’s CEO and former Microsoft executive will step down from the role and return to Microsoft to run an expanded devices division. His name has come up as a possible candidate to replace Microsoft CEO Steve Ballmer, who announced his retirement earlier this month.

Opinion is divided as to whether this is a good idea for either company, with some seeing it as an act of desperation on the part of both Microsoft and Nokia. On hearing the news, investors boosted Nokia’s share price by 41% while discounting Microsoft’s by 5%.

Microsoft, whose dominance in the PC market has continued to wane as consumers and businesses migrate increasingly to mobile, has faced an uphill struggle trying to break into the mobile market. The original deal with Nokia requiring them to focus exclusively on the Microsoft platform has resulted in only small gains in the share of the smartphone market, mainly at the expense of the other ailing smartphone company, BlackBerry. It is very hard to see how it will reach what some analysts claim to be an achievable 15% market share within five years. Even the once dominant Apple has struggled to maintain market share against the combination of Google, Android and a range of manufacturers led by Samsung.

Before Microsoft considers the issue of its overall market share, it has more practical problems to overcome. The first challenge is that Nokia’s revenues have been declining over the past three years, with its last reported quarter resulting in a US$151 million loss. The uncertainty created by the sale may accelerate these losses, combined with the question of what Microsoft will do with all of the feature phones that Nokia sells. Given that this is not core to Microsoft’s business, it will be trying to move people onto smartphones as quickly as possible.

The second challenge is keeping Nokia from disintegrating entirely. The company has been part of Finland’s history for 150 years and by some accounts Nokia staff and the Finnish people generally are not entirely happy with the sale. Talented staff may choose to leave rather than work for Microsoft, compounding the difficulty of integrating a European company into Microsoft’s US-based corporate culture. Balancing this is the general acceptance that Nokia’s future was never assured without the sale and so this was perhaps the only option.

The final challenge for Microsoft will be to make sure it doesn’t kill the Nokia brand entirely through pure inertia. As a possibly sobering comparison, and after two years of trying, Google has not particularly succeeded in making significant headway with its smartphone company Motorola. Unlike Google though, Microsoft doesn’t have to worry about alienating other smartphone manufacturers by its direct promotion of Nokia. Windows has been largely ignored by other companies and Nokia makes up 80% of the Windows smartphone market. Microsoft can afford to not have any other manufacturer offer Windows phones.

Microsoft’s move into phone hardware comes at a time when the smartphone market is maturing and attention is already focused on connected “wearables” like smart watches and glasses. Right on cue, Samsung is today likely to announce its smart watch “Gear”. Expanding the Android ecosystem and providing a literal extension of the smartphone, the ability for devices to inter-operate will become an increasingly important part of the decision to buy one technology over another. In this regard, companies like Samsung have a huge advantage over Microsoft in that their products cover the spectrum of connected technology, from phones to computers, smart watches, TVs and fridges. On its own, a smartphone these days is simply not that smart.

Overall, Microsoft’s purchase of Nokia has probably extended its life for a few more years. Whether it succeeds in reversing its decline and keeping it off life support is yet to be seen.