Microsoft doubles down on smartphones with Nokia smartphone acquisition

Steve Ballmer, Microsoft’s CEO

Microsoft  has announced it will spend nearly $7.2 billion U.S. to purchase substantially all of Nokia’s Devices & Services business, and obtain a license of Nokia’s patents, which Nokia retains. The transaction, which Microsoft says will be funded by overseas cash resources, so as not to impact on dividends, should close in the first quarter of 2014, subject to regulatory and Nokia shareholder approval.

”For Microsoft, this is a bold step into the future and the next big phase of the transformation we announced on July 11,” said Steve Ballmer, Microsoft’s lame duck CEO, in an email sent to Microsoft employees Monday evening. The two companies have been joined at the hip since a February 2011 partnership. Microsoft says this deal is designed to accelerate the growth of its share and profit in mobile devices through faster innovation, increased synergies, and unified branding and marketing.

It also gives Microsoft a leadership infusion. As part of the deal, Nokia CEO and President Stephen Elop will return to Microsoft, which he left for the Nokia job in 2010, to head up an expanded Devices team, reporting directly to Ballmer. Since Ballmer has already announced he will resign and step down once a successor is chosen, a natural conclusion is that Elop now becomes a strong potential successor.

“This definitely puts Elop on the short list for Microsoft CEO,” said Rob Enderle, principal analyst at the Enderle Group. “This potentially gives Microsoft a perfect CEO candidate, mobile, experience, and deep knowledge of Microsoft’s problems.”

In terms of Microsoft’s strategy here, the key takeaway for the channel is that this is really a consumer-focused story, which is unlikely to have  direct impact on most partners, and which also says very little about the role of the channel in Microsoft’s broad go-to-market strategy.

“The focus here is strategic, not tactical, and channel shouldn’t be overly concerned,” Enderle said.

Ballmer’s partner-related comments regarding the acquisition in his email stress the broader opportunity it creates.

“Clearly, greater success with phones will strengthen the overall opportunity for us and our partners to deliver on our strategy to create a family of devices and services for individuals and businesses…” he said. “We are committed to working with partners, helping them build great products and great businesses on our platform, and we believe this deal will increase our partner value proposition over time.”

Microsoft’s projections of success from the deal are not modest. A 30 page PowerPoint presentation which Microsoft created to explain its case for the acquisition stated that with the acquisition, by 2018, they expect to have 15% market share in smartphones – almost five times the 3.3% share Gartner gave it in Q2.

Is this realistic? Tony Cripps, principal device analyst at analyst firm Ovum thinks that the deal has the potential to raise Microsoft to the status of a serious competitor to Apple, Google and Samsung in this market.

“There is still much to resolve if the acquisition is really to have meaningful impact,” Cripps said. “While Microsoft and Nokia have jointly been increasing the money flow through the Windows Phone marketing faucet of late, it will take megabucks to take on Apple and Android head-cheerleader Samsung for marketing volume and volume shipments. We need to see that kind of commitment coming before we can really count Microsoft in the same league as its two main competitors.”

Cripps said that Microsoft needs to leverage successfully the competitive advantages it does have to have a shot – “in gaming (via Xbox), in consumer-business crossover services such as VoIP (Skype) and in the ease of integration of Windows Phone with its own Office 365. Moreover, we shouldn’t forget its huge global installed base of PCs, which are as much a part of the complete picture as smartphones, tablets and online services.”

But while many of the pieces are there, combining them effectively is something else, Cripps said.

“Execution is another matter, and Ovum needs to see sustained progress in Windows Phone shipments over the next three or four years – 15% market share is a good target to aim for – to be convinced that Microsoft can establish itself as a real consumer tech market maker rather than a follower.”

In addition to Elop, EVP in charge of Smart Devices Jo Harlow, EVP of Operations Juha Putkiranta,  EVP of Mobile Phones Timo Toikkanen, and EVP of Sales and Marketing Chris Weber will transfer to Microsoft when the transaction closes. Putrikanta will lead the integration effort on Nokia’s behalf. Ballmer said Microsoft plans to keep Weber’s Nokia field team intact and as the nexus of the devices sales effort, to continue to build sales momentum. After the deal closes, that team will be placed under Microsoft’s COO Kevin Turner.

“We will develop a single integrated team that is selling to operators, and there may be other integration opportunities that we can pursue.” Ballmer said.

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