In a widely expected move, Microsoft is buying Nokia’s handset division, giving it the hardware it needs to compete in the new war of ecosystems against Apple and Google. The only surprising thing is that Microsoft paid more for Skype (US$8,5bn, in May 2011) than it did for Nokia ($7,2bn).
It’s tempting to proclaim the end of the age of services in favour of the age of selling things. But Nokia’s handset and services division brings with it some impressive intellectual property, including superb maps and music services. And, as Apple has shown us with varying levels of success, selling things (like iPods or iPhones) is a nifty way of selling services.
But, like the Skype acquisition, commentators will be asking: how it will work. Will Microsoft suck Nokia into the middle-management malaise that permeates Redmond?
Microsoft’s other significant acquisitions have had a less than successful integration: Overture, an early Web company which pioneered the AdWords concept that is now the foundation of Google’s search empire, is one example.
Until Skype, Microsoft’s previous biggest purchase was aQuantive, an advertising company that it paid $7,3bn for in 2007 and which required a $6,2bn write-down last year. It’s still not clear whether Skype will deliver something to the bottom line, even if the user experience has improved for Microsoft’s consumer.
At least we know that the next attempt at a tablet (after the $900m write-down disaster that was Surface) will be a decent one, powered by Nokia’s design team and hopefully avoiding the usual Microsoft strategy of trying to please too many internal and usually conflicting purposes.
The problem for Nokia is whether the old-school Windows protectionism will dictate mobile development or whether Microsoft will give the mobile experts it has just bought free rein.
Microsoft, as has been exhaustively noted, is in a bind: its Windows and Office divisions are its cash cows but it has not fully embraced mobile, which is where all the growth is coming from as the PC era stalls and desktop computer sales plummet.
They must be wearing sackcloth and ashes in Helsinki at the thought of this key strategic and economic asset (Nokia contributes a sixth of the Finnish economy) slipping out of the country and out of Europe.
Nokia’s shareholders should be happy, as the loss-making phone giant reels from misjudging the smartphone era. Its Windows Phone-powered handsets have failed to recapture its once dominant market share.
Microsoft is paying $5bn for the handsets and $2,2bn to license its patents for 10 years, crucially in a nonexclusive arrangement. So Nokia could conceivably sell the patents to other manufacturers.
Nokia will be left with its networking division, boosted by its recent acquisition of the stake held by its former partner, Siemens.
While Apple’s own mobile hardware business grew organically and has boomed, Google’s purchase last May of Motorola hasn’t produced anything noteworthy in over a year. Now Microsoft has to avoid the same pitfalls, but it has the very capable Stephen Elop to help it.
Elop headed Microsoft’s Office division before being poached three years ago to the month to save Nokia from what he called a “burning platform”. He is now being touted as a replacement for CEO Steve Ballmer, who last week announced he would retire within the next 12 months.
Microsoft needs someone to steer it forward into the 21st century’s mobile age. It’s something even Microsoft surely can’t mess up.
- Toby Shapshak is editor of Stuff magazine. This column was first published in Financial Mail