Acquisition after a Failed Alliance: What Next for Microsoft-Nokia

Two iconic brands that most of us have experienced are now getting together. Microsoft's acquisition of Nokia's mobile phone business for Euro 5.44Bn could light a spark in an industry that has become a duopoly between Apple’s iOS and Google’s Android platforms. There is no doubt that both Microsoft and Nokia have fallen behind their peers over the last 5-8 years, failing to notice and recognize tectonic shifts in their markets. This deal could put them back in the reckoning, for at least the bronze medal.

Microsoft has traditionally been a software & services company; its recent foray into devices (Surface tablets) has not been particularly impressive. Nokia was, till 2012, the worldwide leader in mobile phones and continues to make impressive devices for all market segments. The complementarity has been further established through a 2-year long strategic alliance between them. Unfortunately, the partnership did not yield much: Windows Phone has just 3.7% share of the smartphone platform market and Nokia doesn’t even feature in the top 5 global smartphone vendor list. Will an acquisition help them achieve the magic that an alliance could not?

For Microsoft, the acquisition is not so cheap; while it gets about Euro 10Bn in annualized revenues, operating margins are at zero. Even with annual operating synergies (read: head-count reduction) of Euro 450mn, Microsoft has to believe in a major turn-around of the business. In its analyst presentation, Microsoft has assumed a 15% share of the global smartphone market to demonstrate long-term value creation potential. From Nokia’s current 3% share, it is a long journey ahead. 

In 2011, new (ex-Microsoft) Nokia CEO, Stephen Elop wrote to his team about them being on “a burning platform” and sought to “take a bold and brave step into an uncertain future”. It must be conceded that at least the fire did not consume them. Its Lumia range of phones have been well received and in several markets outside the US, they are amongst the top 5. However, with even Blackberry (the other beleaguered smartphone company) putting itself on sale, Nokia probably ran out of options. Given its reliance on Microsoft’s operating system, it is likely that the Nokia board did not explore a wide range of suitors. 

For this deal to be successful, Microsoft has to take a fresh look at its mobile device and services strategy. Competing head-on with Apple, Google / Samsung and possibly Amazon would not make much sense. Microsoft-Nokia has to create new spaces for itself, whether in terms of customer segments and / or geographies. It could become a price warrior in emerging market regions where the Nokia brand still has huge salience. Alternatively (or additionally), it could focus on its stronghold, the enterprise market; acquiring Blackberry could be the next step in such a strategy.

Nokia’s transformation from a Finnish paper production plant into a global technology major was a remarkable story. Can Microsoft help Nokia rise again from its current depths? 


(This first appeared in DNA on September 4, 2013)

Update: Sharing a few additional comments that I wrote on my Facebook discussion on this topic, particularly around Blackberry and what constitutes an Enterprise play.

BlackBerry as a B2B services / apps player would be of value... Not much left in their devices play (except the familiar qwerty keyboard). 
When I think of enterprise segment, I am not looking at the end-user mobiles as they are today... there are many Business applications that are yet to get mobile-enabled... at some point, with security and data privacy concerns, CIOs could start playing a role (again) in decisions on devices, networks and applications. For instance, BlackBerry has a major play in Automobile OS (through their QNX acquisition)... that is an example of enterprise mobility. There could be similar stuff in Healthcare, Education, etc. These can be huge markets and are not necessarily (directly) tapped by Apple, Samsung or HTC -- yet.
Maybe I expect too much disruption from MS, but let me reiterate: the enterprise mobile market is not what we see today. It is not just a smartphone / device market. It is not Office or email either. Those are being addressed quite well by Android and iOS now. Somebody will disrupt the enterprise software / mobility market. It can be transformed; folks are working on it. Good chance it will not be an insider.