Quick Thoughts: Nokia Gives Microsoft an Offer it Can’t Refuse

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–          The Street will hate the MSFT/NOK deal, but it smells like the result of an ultimatum – without NOK, Windows Phone would be dead and both companies knew it.

–          At least MSFT got a better deal than did GOOG faced with its ultimatum from MOT – “only” $7.2B brings a better brand, better engineering, better distribution and access to better patents.

–          Winding down feature phones will be a painful drag, but MSFT can take more pain than NOK. In house, Windows Phones will get more resources and a better shot at a viable future.

–          MSFT could do worse than Stephen Elop as CEO– Windows was a bad call, but execution since has been ok. Meanwhile, NOK, unshackled from feature phones, has an interesting SW and services biz.

The Finnish conspiracy theorists will say that this was the plan all along. Microsoft loyalist Stephen Elop gets the CEO chair at Nokia, bets the farm on Windows Phone, then sells the crown jewels (and himself) back to Redmond for a fraction of its value when he took the job. This theory casually ignores the hole that Nokia’s previous management had already dug for the company with its stubborn refusal to admit its smartphone failure. Nokia could easily have been with Blackberry circling the drain clinging to its home-grown smartphone software platforms. Instead, it gets to unload its dying feature phone cash drain and risky Windows driven Lumia business, securing a long term customer for the location-based services and software business that it is keeping along with a much needed cash infusion. This is a better result for Nokia than if it was a failing Android also ran with a dying feature phone business.

Microsoft HAD to be frightened for the financial health of its most important Windows Phone partner. The real opportunity for Windows Phone is in an enterprise market that has been glacially slow to develop, but that could be large and lucrative to Microsoft in the long run. There is a lot of future value in having a single operating platform that extends from the smartphone, through tablets, to desktops and to virtual machines in the cloud, but that value will never materialize if the only real manufacturer of Windows smartphones gives up the ghost. With Nokia hemorrhaging cash as its once dominant featurephone platform died on the vine, the company had dwindling resources to invest into the promising but slow to take off Lumia Windows flagships. Under the pressure, Nokia could have decided to pull back investment further, exit smartphones, or *GASP* license Android. None of these outcomes would have suited Microsoft’s strategy and the Nokia board may have forced Ballmer’s hand with an ultimatum. Now Microsoft’s investors will have to live with another declining cash drain as the company dismantles Nokia’s large and proprietary non-windows Asha product line.

Still, it’s not all bad for Microsoft. Nokia has excellent engineering, hardware design, manufacturing and distribution capabilities, particularly compared to the shell of Motorola that archrival Google bought in 2012. Under the Microsoft flag, Nokia customers and suppliers will breathe a sigh of relief, gaining confidence in the staying power of the Lumia mark. Arguably, the Lumia line, with its world beating cameras and differentiated navigation/maps/location functionality, has been amongst the most innovative smartphones in the market for a while. Perhaps Microsoft’s resources can get it a bigger share of mind in the market.

The rumor mill will now put Nokia CEO and former Microsoft executive Elop at the front of the line for Ballmer’s job. Investors won’t like it, but he’s a solid execution guy with deep understanding of the business and its strategy. Yes, committing all in to Windows may have been a mistake, but Nokia under his leadership has retained a lot more relevance than its erstwhile rival Blackberry, which remains on its quixotic quest to establish its own proprietary platform while it burns the cash being spun out by its profitable but dying email business. It may be damning with faint praise, but if you like Microsoft’s forward going strategy, and I do, Elop would keep it the same and execute it well. Of course, the featurephone business is an obvious drag on sales and earnings, as well a giant write off waiting to happen, and the deal may well have bought Microsoft investors another two years of sideways trading. Nonetheless, it may be the right thing to do for the long run.

 

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