Microsoft and Nokia – the cards have been reshuffled

Photo by Nokia

Photo by Nokia

On Tuesday, 3 September, Microsoft announced that it will buy Nokia’s mobile phone business for 5.44 billion euro. The deal is subject to regulatory approval and is expected to close during the first quarter of 2014. There is no big danger that it will not be approved.

A lot has already been written about the purchase and its impacts on Nokia and the Finish economy. What I am curious about is why Microsoft spends more than 5 billion euro for this, although Nokia and Microsoft had already been working well together for some time on the Windows phone. Does Microsoft see their chance in boosting their Windows operating system now that both Symbian and BlackBerry OS are basically out of the race, leaving only Android, iOS and Windows as major mobile operating systems for smartphones? Or does Microsoft see advantages of owning both mobile hardware and mobile operating system in one hand, as it has been very successful for Apple? Or do they plan to benefit from the synergies of one operating system for mobile devices, tablets, PCs and game consoles?

Microsoft’s Windows mobile operating system currently has a market share of 3.7%, however showing more than 75 % growth during the second quarter of this year. Nearly 9 million Windows phone devices were shipped in the second quarter (source: http://www.theinquirer.net/inquirer/news/2288020/android-nears-80-percent-market-share-as-ios-plummets). This could support my first guess. Even if there was nearly no growth any more, and if we took an assumption of 50 euro profit per phone, the total profit on Windows smartphones could be more than half a billion euro per quarter. If Microsoft managed to sell 50% of all Windows smartphones (not to forget that also LG, HTC, Huawei, Samsung and others have been selling Windows smartphones), the annual profit could reach more than a billion euro per year. Not bad for a total purchase price of 5.44 billion.

What about owning both mobile hardware and mobile operating system in one hand? It would be too simple to say that this is a safe key to success just because it was a very successful approach for Apple. Time has changed, and the success of Android shows that open systems do have their business advantages. Nevertheless the combined ownership of both hardware and operating system can provide synergies, particularly if the same operating system can be used for different groups of devices. Here Microsoft has an advantage since it includes smartphones, tablets, PCs and game consoles. The latter is a clear value compared to Apple; Apple does not produce game consoles.

Finally I am curious how the European ICT sector will be impacted by this deal on the long run. Though there is no way to stop consolidation, I consider this as a rather bad day for Europe, because Europe loses yet another important asset. After all there are not many European ICT manufacturers left. My hope is that the Future Internet Public-Private Partnership (FI-PPP) projects will bring a few new European ICT players into the game.
So we may be anxious to see how the race will develop. I personally believe that since Tuesday Microsoft has increased their chances to be successful in the mobile smartphone race. Interesting that the latest development of the share prices suggest a different outcome.

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