Why the Microsoft – Nokia acquisition happened

Nokia and Microsoft just ended their joint press conference, in an effort to explain the acquisition the companies announced earlier today. As with any major announcement, especially with a brand like Nokia which invokes a lot of emotion, the reactions were predictably…. emotional. Risto Siilasma probably said it best, at the joint Nokia press conference in Finland – The acquisition is “Rationally perfect, emotionally complicated.” which we wholeheartedly agree with. But what drove the companies towards this deal? Why did Microsoft buy Nokia? What’s in it for both the companies? We try to explain with two points of views, read on.

Why Nokia entered the deal

The Smartphone market was going through a fundamental change. The Industry was becoming a duopoly with many established companies disappearing, like for example HP/Palm. It was also clear that the strategic shift to Windows Phone meant that the company cannot do it alone in the devices and services arena.

Apparently, the Nokia board has been evaluating the options ever since Microsoft introduced Surface, which is considered as a tectonic shift in the broader Windows Ecosystem. They decided that the best opportunity for a device business to prosper is to be a company with tightly aligned OS+Devices+services, which Nokia isn’t.

At MWC, Feb 2013 – Ballmer called for possible acquisition which triggered many meetings with the board. After over 50 board meetings, the members had finally decided to go through with the deal, in which Microsoft will acquire Nokia’s handset business and the services built around it, while keeping cash cows like Here and NSN.

This is also seen as a perfect transition opportunity for Nokia to turn into a service provider rather than a product company. The handset business has been in a downward trend for the company ever since the iPhone disruption, and it hasn’t been making a lot of profits either. Even with 7.4 million unit sales of Lumia devices the last quarter, the feature phone business still faced a lot of erosion in market share. Nokia was possibly only one of the few companies that failed to transition its feature phone users to Smartphones.

So, by just selling the handset business to Microsoft, Nokia automatically becomes profitable(once the deal goes through) with enough financial strength to innovate in the remaining spaces, which was not at all possible before. Good business move for Nokia? Damn right it is. They can also work on expanding their already robust licensing business in Here, NSN and Patents, without the burden of a loss-making handset division.

Why Microsoft entered the deal

As you might know by now, Microsoft announced a major transition into a “devices and services” company, with the announcement of its Surface products being the highlights of the transition. This was further ramped up by the recent massive re-org of the company and the telling retirement of Steve Ballmer as CEO. Microsoft was increasingly making it clear in their approach that “Devices and Services” are the way to go, an indirect admission of their floundering licensing business in the consumer segment. This is also “Microsoft trying to be Apple”, which is incidentally the very first thought that came to me after the acquisition announcement was the same.

Envious of huge margins, Microsoft too is now pursuing this route, and for simple reasons – more revenue and increased shareholder value. But with Windows Phone, they had to do something, and something real quick. Buying Nokia’s handset business fits right in with “real quick” because vertical integration is highly sought after and with Nokia being an independent company, there was always a chance of them straying away if the results don’t turn out well.

By buying Nokia’s already committed Windows Phone business, Microsoft suddenly became a sizable player in Mobile hardware. And with overall tight integration, Microsoft might have just acquired what they wanted in mobile, especially after their new “Devices and Services” approach. Again, this makes for good business sense and rationale, as explained in our earlier look into Microsoft’s slides.

But, the big question here is, will this work out for Microsoft? Because with this announcement, Nokia might have just re-invented itself into a different company while it is just make or break for Microsoft’s mobile vision. What do you think? Does the business logic for the two companies in transition make sense? Sound off in the comments section below.