Nokia and Microsoft: a smart or futile deal?

At first glance the deal makes perfect sense. Microsoft has struggled to grow its share of the global handset operating system market, with the latest data suggesting Windows Phone has taken just under 4 per cent of the global smartphone share. Nokia is in even worse shape. While its current share of mobile phones looks respectable at 14 per cent, only about half of these sales came from smartphones, which, for the first time in history, outsold more basic phones globally in Q2 of 2013. Estimates put Nokia’s share of the global smartphone market at around 8 per cent. That’s quite a stumble for a company that had 30 per cent of that business only four short years ago.

Keeping the patents out of it for a second, the £3.12bn buy price provides a stark illustration of the remarkable downfall of Nokia. The final acquisition price values Nokia’s devices business at around 3 per cent of the value of Samsung and just over 1 per cent of Apple. Granted, both these companies make more than just mobile phones but a recent estimate from research firm Strategy Analytics estimated both Samsung and Apple made a profit of $5bn, about £3.2bn, from their respective global handset sales during Q2 this year. That means both companies made the same amount of money as Nokia is worth from just three months of recent trading.

For Microsoft this is an opportunity to enter the world of mobile hardware production. Despite repeated rumours of a Microsoft Phone being imminent, the company has yet to make a mobile handset of its own. In fact, up until last year, the only major product Microsoft had manufactured was the Xbox. The subsequent disastrous launch of Surface tablets only underlined its shortage of core competence in this area, despite the company’s long-held ambition to succeed in both software and hardware arenas. The Nokia deal finally gives it the capability to make both hardware and software for smartphones.

Microsoft will also gain a potential CEO from the deal. After three years in charge of Nokia, Stephan Elop will step down from the post and return to his former employer Microsoft as the vice-president in charge of devices and services. Analysts also expect Elop to become the anointed replacement for outgoing CEO Steve Ballmer over the coming months, which makes my column on Ballmer’s shortcomings last week particularly prescient. Arguably, only Elop could match Ballmer on the ‘crap CEO’ scale. During his tenure, Nokia’s value dropped by a whopping 85 per cent. He’ll fit right in at Microsoft.

But the most intriguing question as usual is one related to branding. Read the announcement carefully and you will note that while Microsoft’s acquisition includes the purchase of Nokia’s smartphone sub-brand, the Lumia, and its lower-end mobile phone sub-brand, the Asha, it will only have rights to the Nokia brand in association with current mobile phone products. As the agreement states: “Nokia will continue to own and manage the Nokia brand.”

Microsoft might have bought access to Nokia’s technology and the contracts of some 32,000 employees but it doesn’t get the masterbrand. Nokia is not becoming part of Microsoft – it will continue to operate as a network and tech company now free from the albatross of handset losses.

So the real story at the heart of this massive deal is all about Microsoft. It now has the capability to manufacture handsets and, thanks to Windows Phone, it also has a software platform to run on those handsets. So it has the capability to sell smartphones but does it really have a chance in a market dominated by the ruthless efficiency of Samsung and the artistry of Apple? I very much doubt it.

You could argue there are genuine synergies in the deal between Microsoft and Nokia, or you could see it as two drowning men, reaching for each other in the dark as the ocean around them grows ever more dark and chilling. This deal could prove a return to form for both or be the final twist in a remarkable story of shared decline.