Early this morning Microsoft acquired Nokia for €3.79 billion (plus €1.65 billion for patents). It is a deal that makes no sense.
While industry observers love to pontificate about mergers and acquisitions, the reality is that most ideas are value-destroying. It is far better to form an alliance or partnership; most of the benefits, none of the costs.
A partnership similar, in fact, to the one formed just two years ago between Microsoft and Nokia.
From Microsoft’s perspective, that was a brilliant deal; Matt Drance characterized it as “Microsoft Buys Nokia for $0B,” and he wasn’t far off. The premier pre-iPhone phone maker, with what was even then one of the best supply chains, distribution networks, and brands in the world would be exclusively devoted to Windows Phone.
There is nothing further to be gained by an acquisition.
Moreover, the fact Steve Ballmer is stepping down makes a deal of this magnitude hugely problematic. Guy English has already characterized Ballmer’s disastrous reorganization as a straitjacket for the next CEO; adding on a mobile phone business that Microsoft probably should abandon is like attaching an anchor to said straitjacket and tossing the patient into the ocean. It will be that much more difficult for the next CEO to look at Windows Phone rationally.
So that brings us to the Nokia perspective. I have argued that Stephen Elop made a massive strategic error by choosing Windows Phone over Android; coming from Microsoft, he failed to appreciate that Nokia’s differentiation lay not in software, but in everything else in the value chain. It would have been to Nokia’s benefit to have everyone running Android, including themselves. Everyone would have the same OS, the same apps, may the best industrial design, distribution, and supply chain win.
Elop threw it all away.
Today no one cares about Nokia’s industrial design, distribution, or supply chain, because their devices lack an app ecosystem, the price of entry into smartphones. Perhaps even now, Nokia was considering going to Android, or maybe even going out of business.
And thus I believe we’ve arrived at the rationale for this deal.
I theorize that Nokia was either going to switch to Android or was on the verge of going bankrupt. (I suspect the latter: part of the deal included €1.5 billion in financing available to Nokia immediately, and the fact Microsoft had to take Asha but not the brand or maps suggests they were trying to keep the price as low as possible). And, had Nokia abandoned Windows Phone, then Windows Phone would be dead.
Windows Phone has already been largely abandoned by other OEMs; Samsung and HTC make warmed-over versions of 6-month old Android hardware, and that’s really about it. Of course that will now stop, Microsoft’s protestations to the contrary, but regardless, without Nokia it would be over.
And so, I would argue that this deal is not unlike the Motorola one, where I believe Google had its hand forced by Motorola’s threat to sue other Android OEM’s for all they were worth.1 Microsoft felt they didn’t have a choice.
The tragedy in the deal, as I hinted at earlier, is that I think Microsoft ought to abandon Windows Phone. The war is over, and iOS and Android won. It would be far better for Microsoft to focus on serving and co-opting those devices, instead of shooting the most promising parts of their business in the foot for the sake of a platform that is never going to make it.
At the very least, it shouldn’t have been Ballmer’s decision to make.
To be clear, that’s the only similarity here ↩