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Brier Dudley's blog

Brier Dudley offers a critical look at technology and business issues affecting the Northwest.

September 2, 2013 at 8:51 PM

Microsoft Nokia deal: Ballmer’s bold swan song

Steve Ballmer wasn’t kidding about Microsoft becoming a devices and services company.

In a spectacular swan song, he’s turning the company into the world’s second largest phone maker as he walks out the door.

You’ve heard of golden parachutes for departing executives. This may be a golden parachute the executive is leaving for his employer. Or a lead balloon, if Microsoft can’t increase the momentum of Nokia’s device business.

Apple fans may scoff about this being two losers together in a leaky canoe. But think about what Microsoft’s getting with Nokia’s device business.

Nokia remains a titan of the mobile phone world with twice the market share of Apple and far more in-house expertise in manufacturing and distribution of phones, particularly to overseas markets and developing countries where Nokia has a commanding presence.

In short, Microsoft is about to become one of the world’s pre-eminent designers and manufacturers of wireless devices.

Microsoft’s paying $7.2 billion for the business, plus offering to loan Nokia $2 billion of that before the deal closes, to finance a reorganization of its remaining business operations. Nokia remains the pride of Finland but – like BlackBerry in Canada – its early lead in the industry has slipped away in the face of intense competition from smartphone makers, particularly Samsung and Apple.

In a Hail Mary move in 2011, Nokia dropped development of its own operating systems and embraced Windows Phone. The deal has yet to revive Nokia’s fortunes and has just barely begun to grow Microsoft’s share of the phone business, in which it remains a distant third behind Google’s Android and Apple’s iOS platforms.

Whether Microsoft can do better itself with Nokia’s phone design and manufacturing expertise under its sprawling roof remains to be seen. Another question is whether Nokia’s infrastructure can be leveraged by other Microsoft groups producing hardware such as the Xbox and Surface tablet.

Either way it will rapidly advance and test Ballmer’s strategy to transform the company from a software conglomerate into a business providing both software services and devices. It also puts Ballmer and his successor on more equal footing to compete with Apple and Google, both of which directly control design and manufacturing of devices bound to their services.

The deal is likely to increase speculation that Nokia Chief Executive Stephen Elop – a former head of Microsoft’s productivity software group – may replace Ballmer. Elop’s expected to return to Microsoft when the deal closes. For now he’s been removed from Nokia’s board and an interim chief executive has been named, to avoid conflicts of interest.

“It’s a bold step into the future – a win-win for employees, shareholders and consumers of both companies,” Ballmer said in a release. “Bringing these great teams together will accelerate Microsoft’s share and profits in phones, and strengthen the overall opportunities for both Microsoft and our partners across our entire family of devices and services.”

Ballmer noted that Nokia “brings proven capability and talent in critical areas such as hardware design and engineering, supply chain and manufacturing management, and hardware sales, marketing and distribution.”

Having Nokia’s devices business is also going to make Microsoft even more complicated to manage and more difficult for investors to understand. It’s good news for the Puget Sound region as long as the mother ship holds together with this new pontoon bolted on the side.

Although Nokia’s been overshadowed by the iPhone in the U.S. over the last five years it remains a force in mobile phones globally with an enviable network of factories and distributors.

The devices and services business that Microsoft is acquiring design and produce hundreds of millions of phones a year in extensive manufacturing facilities around the world. Nokia’s devices include the Lumia line of smartphones that’s the flagship of Microsoft’s Windows Phone platform. Altogether Nokia’s devices and services businesses had sales of about $20 billion last year.

Nokia was long the world’s largest phone maker but was recently unseated by Samsung, which has ridden the growth of Google’s Android platform. In the second quarter Nokia had 14 percent of the world’s phone market, producing 61.1 million handsets, according to research firm IDC. Samsung had 26.2 percent of the market and Apple had 7.2 percent.

Still, much of Nokia’s sales are lower-end devices that don’t use Microsoft software and services. Whether Microsoft can push its software and services down into that segment of the market will be one of the challenges for Ballmer, Elop or whoever else is running the company in 2014.

Microsoft appears to be getting a pretty good deal. Instead of spending billions and years of labor trying to establish itself as a mobile device maker, it’s making those strides in six months, using spare change parked in its European bank account.

Like other big tech companies, Microsoft stashes overseas earnings abroad to avoid paying U.S. taxes when the money is brought home. That makes overseas acquisitions such as Nokia and Skype more appealing: it puts that parked cash to better use, reinvesting it back into the company rather than waiting indefinitely for lawmakers to offer a tax break on foreign earnings.

It’s also a clever response to investors who continually demand that Microsoft return more of its cash via dividends and stock buybacks.

Microsoft’s no longer a startup that needs every penny in the bank, but it’s in a pitched battle to remain relevant through the next generation of computing. Isn’t it wiser for Ballmer to place a big bet on the company’s new future, rather than further line the pockets of activist investors who are angling to milk an aging cash cow?

 

 

 

 

 

 

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