Two iconic brands that most of us have experienced are now getting together.
Microsoft’s acquisition of Nokia’s mobile phone business could light a spark in an industry which has become a duopoly between Apple’s iOS and Google’s Android platforms.
There is no doubt that both Microsoft and Nokia have fallen behind their peers over the last 5-8 years, failing to notice and recognise tectonic shifts in their markets. This deal could put them back in the reckoning, at least for the bronze medal.
Microsoft has traditionally been a software and services company; its recent foray into devices (Surface tablets) has not been particularly impressive. Till 2012, Nokia was the worldwide leader in mobile phones and continues to make impressive devices for all market segments.
The complementarity has been further established through a two-year long strategic alliance between them.
Unfortunately, the partnership did not yield much: Windows Phone has just 3.7% share of the smartphone platform market and Nokia doesn’t even feature in the top 5 global smartphone vendor list. Will an acquisition help them achieve the magic that an alliance could not?
For Microsoft, the acquisition is not so cheap; while it gets about €10 billion in annualised revenues, operating margins are at zero. Even with annual operating synergies (read: head-count reduction) of €450 million, Microsoft has to believe in a major turnaround of the business. In its analyst presentation, Microsoft has assumed a 15% share of the global smartphone market to demonstrate a long-term value creation potential. From Nokia’s current 3% share, it is a long journey ahead.
In 2011, new (ex-Microsoft) Nokia CEO, Stephen Elop wrote to his team about them being on “a burning platform” and sought to “take a bold and brave step into an uncertain future”.
It must be conceded that at least the fire did not consume them. Its Lumia range of phones has been well received and in several markets outside the US, they are amongst the top five.
However, with even BlackBerry (the other beleaguered smartphone company) putting itself on sale, Nokia probably ran out of options. Given its reliance on Microsoft’s operating system, it is likely that the Nokia board did not explore a wide range of suitors.
For this deal to be successful, Microsoft has to take a fresh look at its mobile device and services strategy. Competing head-on with Apple, Google/Samsung and possibly Amazon would not make much sense. Microsoft-Nokia has to create new spaces for itself, whether in terms of customer segments and / or geographies.
It could become a price warrior in emerging market regions where the Nokia brand still has huge salience. Alternatively (or additionally), it could focus on its stronghold, the enterprise market; acquiring BlackBerry could be the next step in such a strategy.
Nokia’s transformation from a Finnish paper production plant into a global technology major was a remarkable story. Can Microsoft help Nokia rise again from its current depths?
The writer is a strategy consultant