Nokia-Microsoft Acquistion: A Titan or Titanic

By Anahat Danewalia

The fall of a Titan always makes for a spicy treat. That the Titan in question is Nokia, just makes it all the more juicier. However, in India for a generation that has grown up surrounded by the humble Nokia handsets playing the oh-so-familiar Saare Jahaan Se Achcha ringtone, its fall hits on a more personal level.  15 years back, in 1995, Nokia first invaded the Indian markets with a humble, basic utility phone. Since then, it has defined and revolutionised the Indian Telecom Sector. Today it has its largest market in India, second only to China.

Named in 1871 after the Nokianvirta river by mining engineer Fredrik Idestam , Nokia spent more than a century making tyres, boots or cables before producing its first handheld mobile phone, the Mobira Cityman, in 1987. The basic Nokia 1100, launched in 2003, was a runaway hit, shifting 250 million units, making it not just the world’s best-selling mobile, but the most popular consumer electronics device of any kind. It invaded the very heart and soul of India, making its presence known even through the popular Santa-Banta jokes. Nokia remained the world’s largest vendor of mobile phones till September 2012 when it was very unceremoniously overthrown by the swiftly rising mega player, Samsung; however, it had already lost its lead in the lucrative Smartphone market over a year earlier to Apple’s iPhone.

Nokia unveiled its first Windows Phone handsets, in October 2011 after a strategic decision by new chief executive Stephen Elop to ditch its own ailing and now archaic Symbian operating system in favour of the Microsoft equivalent. Today after 2 years, Microsoft has taken over Nokia in a $7.2 billion deal split between the phone-making unit and Nokia’s patents. Microsoft will spend $5 billion on the phone-making unit, and $2.17 billion on licensing Nokia’s patents.

History repeats itself, only the protagonists change and this time, Microsoft finds itself in the same tight spot as Apple had a score ago. Having brought its Software and Hardware branches under the same roof, it’s in the unique position of either striking gold or going to dust. That Microsoft’s partnership with both Nokia and hTC has not been too successful in the consumer market is a hard fact, well known.  Add to this, the shadow of the company’s search engine Bing, which languishes far behind Google and the cold market response to Windows Surface, just makes the purview more dismal. On the other hand, both Google Nexus and Google search engine have easily conquered most markets. Apple and Samsung with their iOS and Android user interfaces also pose stiff competition.

Why then did in such a dismal scenario Microsoft buy out Nokia? Is there hope?

Well first, had Microsoft not bought Nokia, it would have probably been bought by Google (like Motorola in 2012) and that would’ve increased Google Hardware’s market penetration from 2.8% to roughly 8.6%. That Google’s Android dominates the Software share at a staggering 66.4% vis-a-vis Microsoft’s meager 2.5% would’ve just meant a good opportunity lost. With Nokia’s stock price on a downward slide, an acquisition of Nokia by an OEM would have forced Microsoft to engage in an expensive bidding war for the entire company or continue to build a mobile business without the benefit of a hardware platform. Without Nokia, Windows Phone would’ve been dead fish as the Finnish firm’s handsets accounted for about 84% of all Windows Phone shipments. With its current move, Microsoft has not only rescued its Wall Street position but also greatly economized its costs.

Second, with Nokia comes its vast unlicensed portfolio of patents which Nokia had principally, till now, preferred more to protect its business than invade other markets. The Finnish company has long been a savvy player in the intellectual property market. It sued Apple in 2009 and then reached a licensing deal with the iPhone maker. Terms remain undisclosed, but the deal was believed to be worth hundreds of millions of dollars to Nokia. For Microsoft, taking a license for Nokia’s patents rather than buying them serves a strategic objective as well. Microsoft has already convinced about 20 Android manufacturers to pay patent royalties as part of its effort to raise the cost of Google Inc’s mobile operating system.

Now, with Nokia retaining the freedom to approach Android for royalties, it’s a win-win situation for both. Add to this the pickup in product launches in 2013, including the unveiling of its latest Smartphone with a 41MP camera and its announcement of the launch of a 15-euro phone, its cheapest phone yet and we see silver lining. The future admittedly, does not seem so bleak anymore.

Blending a major acquisition into a company is challenging enough in times of calm. Doing so with the unexpected management change with the outgoing Microsoft CEO, Steven Ballmer-a key player of the Nokia acquisition- could make it even harder. It all depends on how well the Titans play the game now. With most consumers still owning a Microsoft desktop vis-à-vis Apple, Will Microsoft with its new baby be able to once again invade all markets and remain the all time champion or will it succumb and let a golden opportunity go? It will be a tight race but worth a watch. May the best man win!