So we have that unfortunate situation where Google bought Motorola Mobility for the princely sum of $12.5 billion in 2011. It has essentially gone nowhere in terms of restoring a fading handset division to profitability. Besides, the most popular Android smartphones are built by Samsung, which, as the unkindest cut of all, barely mentions Android in the specs and ad materials for the flagship Galaxy S4.
But there have been a number of failed multibillion dollar acquisitions in the tech business over the years, and Microsoft’s own investments have rarely paid off. Take Skype, the telephone and messaging service, which Microsoft acquired in 2011 for $8.5 billion. Skype hadn’t been much of a money maker before the folks from Redmond took over, nor has it been since. So you wonder if it was all worth the investment, although Skype still has tens of millions of loyal users. As one of those loyal users, I don’t feel any more predisposed to do business with Microsoft, and the tiny sum I pay for monthly services hardly counts.
So we now have Microsoft struggling to make a go of the smartphone and tablet business in 2013. The Surface tablet has been a failure. Intended, according to outgoing CEO Steve Ballmer, as a “design point” for Microsoft’s OEMs, there’s been little interest. After all, it’s not as if the original has done so well, considering that Microsoft had to take a $900 million write down on unsold and price-reduced inventory.
Now I would presume Microsoft’s board of directors is busy looking for a new CEO, so what does the company do next?
Well, Microsoft has made Nokia, which has seen better days, the first among equals when it comes to Windows Phone handsets. Since former Microsoft executive Stephen Elop became Nokia’s CEO in 2010, the company’s share of the handset market has plunged, with most sales concentrated on cheap feature phones. Those highly-advertised Lumia smartphones have single digit market shares.
So how do you reward a CEO who has failed at his mission? Well, Microsoft bought the company; more specifically, the handset division, along with licenses for tens of thousands of patents. The entire deal amounts to $7.2 billion, far lower than, as I noted, Google paid for Motorola Mobility, not to mention the Skype transaction.
The deal, which is expected to be consummated in 2014 barring any regulatory hurdles, will return Elop to Microsoft. Indeed, some are suggesting Elop’s next step will be to assume the CEO role at his former employer. Really?
So does it even make sense for Microsoft to buy Nokia’s fading smartphone division at any price? Sure, Nokia has over 80% of the Windows Phone segment all to itself; most of the remaining handsets for the platform are made by HTC and Samsung. But where’s the evidence that such a deal will miraculously cure what ails Nokia? Well, except for providing the company with a huge paycheck to invest in other businesses, of course.
Certainly Wall Street got the message. When Ballmer said he was leaving as CEO, Microsoft’s stock price had a not unexpected spurt. When the Nokia deal was announced, Nokia’s stock price went up 40%, while Microsoft’s went down slightly. Certainly, it’s hard to take Wall Street’s mercurial responses seriously, but it’s also pretty clear who gains from this transaction, and it’s not Microsoft.
In an interview on the Nokia deal, Ballmer claimed OEMs were happy with it. Is he serious? So the company who makes 80% of the Windows Phone handsets will be owned by Microsoft. So where’s the incentive for any other company to stay involved, particularly since the platform occupies a poor third place in the market?
Microsoft already worked closely with Nokia to attempt to boost the mobile platform. It hasn’t worked out so well, although Windows Phone’s share is growing. Just not fast enough. Besides, where is Microsoft’s expertise in building anything but input devices and gaming consoles? And don’t forget the $1 billion write down some years back to repair defective xBoxes. Evidently the media forgot.
Clearly, Nokia benefits by unloading an unprofitable handset division, so the company can focus on network infrastructure and collecting patent royalties. Google hasn’t done so well with Motorola Mobility, and Microsoft’s experience with acquired companies, as I said, is decidedly mixed.
Besides, where would anyone get the idea that Elop has the chops to lead Microsoft? How can someone who is heading an unsuccessful company take over Microsoft and succeed? Where’s his track record for success? What’s his vision? Does he have a vision?
Also, one would think that Microsoft’s board, knowing change was afoot, would have wanted Ballmer to hold off on any major decisions until a new executive was in place. What if the new executive decides the Nokia deal, which wasn’t unexpected, was a bad move? Does Microsoft pay millions to Nokia to undo the deal? Does the board say, well it’s just too late? Besides, if Nokia were forced to keep the handset division, would they feel warm and fuzzy about Microsoft and a decision to continue to build Windows Phone gear?
Now I suppose it is possible Windows Phone will become much more popular in the years to come, particularly as BlackBerry continues to fade. Other than giving OEMs yet another reason to suspect Microsoft’s motives, though, it’s hard to think this deal has any real advantages.
If I had any advice to offer, other than canceling this transaction forthwith, it would be to give Elop his walking papers, and that’s just a start. Of course, there’ a conspiracy theory that Elop was put into Nokia’s leadership position to kill the company’s sales so Microsoft could buy it for a song. Sure, right!
One things certain, and that is that Windows Phone will be in somewhat of a state of suspended animation until this mess is sorted out.
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