Why Microsoft’s Nokia Deal Is Too Little, Too Late

When Microsoft announced last week that it would acquire Nokia for $7.2 billion, it wasn’t exactly a surprise: the two companies had developed such a symbiotic relationship that an all-out merger seemed like the next (and perhaps only) logical step.

As the analysts have pointed out, the deal radically expands Microsoft’s headcount (and complicates its corporate hierarchy) at a time when the company is doing its best to compete against Google, Apple, and other tech behemoths—imagine growing a third arm and trying to figure out how to use it while boxing against a crowd of experienced fighters, and you have some idea of the pain that Microsoft faces over the next several quarters.

So why did Microsoft finally snatch up Nokia? It’s very possible that it had little choice: within days of the acquisition’s announcement, Nokia drew down some $2 billion in convertible bonds offered by Microsoft. Companies don’t make that sort of move when they’re flush with cash; indeed, Nokia CEO Stephen Elop admitted during a post-acquisition press conference that his firm simply didn’t have the money to make the massive development-and-marketing push needed to compete in the broader smartphone industry.

”I share the frustration of being far behind two strong competitors,” Elop told the audience, according to TechCrunch. “I feel sadness because we are changing Nokia and what it stands for.”

If Nokia was circling the drain as a viable enterprise, than Microsoft had little choice but to step in and buy it. Nokia is the world’s largest producer of Windows Phone devices, and its death would have crippled Microsoft’s ability to compete on the smartphone market.

But buying Nokia, and using its parts to create a new smartphone-manufacturing arm, also gives Microsoft some pretty significant problems:

Now It Needs to Actually Run a Hardware Business

By bringing its smartphone production in-house, Microsoft is taking a page from Google (which purchased Motorola and is busy integrating it) and Apple (which always produced its own hardware and software). Apple’s mobile-manufacturing business, of course, is an enormous success; the jury’s still out on Google’s own smartphone-building efforts, but Android’s dominancy of the overall mobile market insulates it somewhat from any consequences of failure.

Both Google and Apple will tell you that running a hardware business is an enormously difficult enterprise, one in which margins can quickly become razor-thin (or disappear entirely) and a failed product has considerable bottom-line consequences; it’s not a business for fools, or the inexperienced. By integrating Nokia and its staff of experienced executives, Microsoft comes into this brave new world with a considerable knowledge base—but it also inherits Nokia’s much-publicized issues. Sorting out those issues while battling experienced competitors for market-share while keeping its other businesses running could potentially prove too much for Microsoft, particularly with a new CEO (which could be Elop) at the helm.

It Just Irritated Every Other Manufacturer

When Elop first came onboard as Nokia’s CEO, he made the decision to abandon the company’s homegrown operating systems—including Symbian—in favor of Windows Phone. It was an all-or-nothing bet on Microsoft’s software, one that other manufacturers have refused to make. Sure, Samsung and HTC have produced the occasional Windows Phone, but their focus is almost totally on Android.

By acquiring Nokia, Microsoft becomes a competitor to those firms, which makes it all the more unlikely that the latter will continue to produce Windows Phones in significant numbers. Why help out a rival, especially when Windows Phone’s market share is such a miniscule fraction of the overall market?

It Doesn’t Solve Microsoft’s Windows Phone Problem

If Microsoft’s devoted considerable resources to developing and promoting Windows Phone, it’s because the company had no choice: any tech firm in the consumer market without a mobile product faces obsolescence. But Microsoft hasn’t gotten a lot of bang for its smartphone buck: despite incremental improvements to the software, and a series of ad campaigns that cost many millions of dollars, Windows Phone remains in very distant third behind Android and iOS.

Acquiring Nokia won’t solve that issue. “At the end of the day, Microsoft has to compete on the attractiveness to the end user for its products, and just having a device producer on board doesn’t get them there,” analyst Jack Gold wrote in an email. “Nor will having Nokia on board dramatically extend Microsoft’s ecosystem in mobility, which is another problem for them to deal with.”

In other words, by acquiring Nokia, Microsoft has made a very big bet with zero guarantee of success—and a lot of problems just waiting to trip it up.

 

Image: Nokia

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