Use access key #2 to skip to page content.

TMFPostOfTheDay (< 20)

The Microsoft Deal



September 06, 2013 – Comments (0) | RELATED TICKERS: NOK , MSFT

Board: Nokia

Author: TMFinept

This is a pretty interesting deal. I think maybe the best Nokia shareholders could have hoped for given the state of the business and yet a rather sad end to a remarkable story of highs and lows in the life cycle of an innovator. It's truly the end of an era.

Microsoft will own the Lumia and Asha brands, but not Nokia. It retains the option/license the Nokia brand but I wonder how long that will continue and for which devices. I suspect that they will probably use it as a bridge on lower end devices in emerging markets where the Nokia brand is still highly recognized, but that we could see Microsoft devices ditch the Nokia brand almost immediately in the USA and for higher-end devices. Long term, my expectation is that for better or worse, all Nokia phones will get the Surface treatment and become Microsoft-branded devices.

I don't know that the Microsoft brand will sell as well as the Nokia brand in emerging markets and I don't think it sells very well in Europe or the United States at all. I'll be curious to see what sort of timeline Microsoft employs in phasing out Nokia branding across the globe but I doubt it will improve retail sales either way. If anything, the Microsoft brand might be an albatross.

Also, I wonder what they plan to do with Asha. It's not clear to me that the devices are well-suited to running a platform like Windows Phone and I don't think they're long for life in a world of ultra low price smartphones. Perhaps Microsoft will aim to skin them with a Windows Phone style interface to provide a ramp for Windows Phone devices. Maybe they'll just turf it. It's high competition, low-margin business and I doubt it's of much interest to Microsoft.

I expect that this move will perhaps precipitate a departure from the Windows Phone arena of Samsung, HTC, and other partners. They were barely only participating to begin with and there's basically nothing left for them to do here now. Turns out Microsoft's royalties on Windows Phone were extremely low so I doubt Microsoft cares either way. I wonder what the impact will be on Surface partners like ASUS, etc. Many were already distancing themselves from Surface due to its extremely poor sales and low appeal, and I expect this will perhaps push more out the door.

The deal Microsoft is getting on Nokia's portfolio of patents is quite interesting and perhaps bodes poorly for the future of Nokia. They're taking the design portfolio, but not the utility portfolio. 1.65B to license the utility patents for 10 years doesn't seem like a lot of money. It barely moves the needle at what's left of Nokia in terms of revenues. The remaining company comprised of NSN, mapping and patent portfolio assets don't seem to make a very compelling business to me. Low margin, low growth, high competition.

I was also quite curious to see that Microsoft will be supplying Nokia with immediate financing in 3x500M installments. Although Nokia's business was in seriously bad shape and the company's financial position was increasingly dire, I don't think they were anywhere near bankruptcy. The net cash position was seemingly more than sufficient to keep the lights on for years to come.

I'd be interested to learn more about the terms of this financing and the reasoning behind it. Perhaps it's to offset the high price of the NSN acquisition from Siemens, which insofar as I see it was done at a high premium specifically in order to enable this deal with Microsoft. I stated early on when Nokia announced its intentions to switch to Windows phone that the ultimate game plan involved Microsoft purchasing Nokia's out-and-out for some very low price, which meant that Nokia would need to dispossess itself of NSN.

I was half right, I guess. Rather than buying the entirety of a Nokia divested of NSN, Nokia took on the entirety of NSN and will split off the handsets for Microsoft.

Turns out nobody wanted to buy Nokia's 50% share of NSN when Stephen Elop shopped it out so the takeover of it from Siemens was perhaps an unsavory and expensive plan B. Maybe this financing reduces the burden Nokia took on in order to pave the road for the devices deal with Microsoft?

One thing this deal really does cement in my mind is that maybe Stephen Elop was actually a plant all along. You can hardly come to any other conclusion looking at this debacle in retrospect.

Elop's first order of business at Nokia was to purposely and publicly cut the company's declining smartphone business off at the knees and replace it with a highly risky plan that most, including myself, called folly at the time. Rather than trying leverage a declining but still powerful business, he elected to basically make a start from zero. Who would have predicted that voluntarily forfeiting around 15% global smartphone market share would have turned out poorly? Everyone but Stephen Elop...

The resulting decline in the business was epic in its speed and scale and left the company totally non-competitive for over a year and only marginally competitive for the year after that while Apple and Google rampaged forward. Nokia's self-inflicted complete dependence on Microsoft left its ability to deliver limited to Microsoft's lackadaisical timeline and with no other long-term course of action but to sell... And here we are. The man who knee-capped Nokia and sold it off near a historic low at the first sign of a turnaround in the devices business will go back to where he came from and probably assume the position of Microsoft's next CEO.

Strange coincidence, no?

Beyond that coincidence, I don't think Microsoft is getting itself much of a deal here - probably more like a write off in a few years. I doubt that they will be able to breathe life into Windows Phone where Nokia failed. It's a reasonable product, but it doesn't bring much to the table to compel people to pick it over more popular competing products. Copying Apple's business as an integrated manufacturer of hardware, software and ecosystem products probably won't work out brilliantly unless Microsoft has something more to offer to consumers than they can get elsewhere... And they do not. As it happens they lose out to Apple insofar as operating efficiencies and vertical integration as well, so even if things do go well, Microsoft doesn't stand to make the sort of lucrative money that Apple does.

Their presentation on the benefits of the deal seem to suggest that mobile isn't a very big business for them. Certainly not one that will propel the company into the future or sustain it if/when other lines of business dry up. More likely it's a sort of last-ditch effort to keep their foot in the door insofar as offering a total, competitive ecosystem is concerned. Without the mobile phone offering, their PCs and console and content offerings are much less compelling to consumers.

Things seem to be picking up a little now, but that pick up is mostly in the low end, which is as always extremely competitive and not all that profitable... And it seems like Apple is now entering the lower-end market as well. If history repeats itself, Apple will make an effort to suck all the profit out of that part of the market.

On a personal note, this is a pretty sad day for me. I worked at Nokia during the genesis of the smartphone and to see it all dismantled seemingly on purpose by what I can only deduce are nefarious actions is truly unfortunate. 

0 Comments – Post Your Own

Featured Broker Partners