My Analysis Of The Microsoft Nokia Deal

Nokia 920Microsoft Nokia deal is the hottest news in the mobile industry these days, so I decided to do my own analysis of the same.

Well Planned Deal Or An Act Of Desperation?

Microsoft entered into a strategic partnership with Nokia in Feb 2011 to make Windows the standard platform for Nokia smartphones. It’s been 2.5 years since then and I think this partnership gave Microsoft sufficient time to evaluate its strategy on the mobile front.

So while it seems unlikely that it is an act of desperation, the question that really begs the answer is whether an acquisition gives Microsoft something extra that the partnership did not.

What Does Nokia Get From This Deal?

Nokia’s market share has been on the decline since the announcement of iPhone. Then came Android and made it even worse. Between 2008 and now, Nokia’s stock price ( NYSE ) has dropped by 90% from around $40 to $4.

I always saw Nokia’s partnership with Microsoft as an opportunity for them to differentiate themselves from other platforms, something they would never be able to achieve with Symbian. Now that they have 80% market share in the Windows phone segment, it was but natural for them to consider the acquisition offer from Microsoft.

Microsoft has a high margin software business with over $70 billion in annual revenue and this should help the fledgling company get back on its feet.

What Does Microsoft Get From This Deal?

The world of computing is going through a transition, with people shifting from PCs and Laptops to Mobile Phones and Tablets, and this is a cause of grave concern for Microsoft since it is not a major player in this segment. It’s first serious attempt at mobile came in 2011 with the Nokia partnership and together they have done an okay job of getting 3.7% market share for Windows phones.

However, in order to grow it from here, Microsoft will have to do something disruptive so as to get users to shift from their Android and iOS devices to Windows phone. This is where it needs to evolve from being a software player to a fully integrated end to end device manufacturer, a capability that Nokia brings to the table. Plus, a fully integrated offering will also mean higher margins for Microsoft ( approx $40 per device sold ) as it currently only gets royalty for the software on the device ( approx $10 per device sold ).

Who Loses In This Deal?

I’d say it is Blackberry!

That Microsoft was serious about getting deeper into mobile is evident from its partnership with Nokia in 2011. And in addition to Nokia, Blackberry would have been the only other serious contender to form the pillar of its strategy.

Even though Blackberry is struggling, it still has over 90 Mn active devices in the market and relationships with most corporations for its push mail service. Given that most of these companies also use Microsoft Windows, a deal with Blackberry will have a lot of synergy for the enterprise business.

Is Windows + Nokia Combination A Serious Threat to Google and Apple?

I don’t think it’s going to be a 3 horse race!

Let’s take a look at the numbers – In the previous quarter, Android share globally stands at 79%, Apple stands at 13.2% and Windows at 3.7%. Last year, Apple had 16.6% market share in the same quarter, so Apple is actually losing market share ( even though shipments are higher in the quarter this year ) and this goes on to say a lot about the market dynamics. If a strong player like Apple is losing market share, and the gap between its market share and the leader is over 65%, it’s not going to be easy for a third player and a relatively new entrant.

Let’s look at the numbers from the market share of device manufacturers for the last quarter. Samsung stands at 30.4%, Apple at 13.1% followed by LG 5.1%, Lenovo 4.7%, ZTE 4.2%. Nokia sold 5.1 million Lumia smartphones in the first quarter of 2013,  and is at No. 10. So the prospects of Nokia devices breaking into a lead do not look very promising either.

Conclusion!

I think Microsoft will need to do something disruptive, if it really wants to take a leadership position in mobile segment. With control over both hardware and software, it now also has the ability to do it. What really happens, only time will tell :).

What is your prediction for Microsoft + Nokia deal?

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