Microsoft buys Nokia: Can Microsoft go mobile?
Microsoft buys Nokia in a $7.2 billion attempt to catch up with the mobile computing revolution that threatens to leave Microsoft in the technological dust.
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Microsoft still hopes to license its Windows software to other smartphone makers. In return, the company receives less than $10 in royalties for each Windows smartphone sold.Skip to next paragraph
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Although Nokia's line of Lumia phones has received some positive reviews, they still have not won over enough fans to establish Microsoft as a formidable force in smartphones.
Phones running on Windows have 4 percent of the worldwide market, leaving them a distant third to Android-powered devices at 79 percent and Apple's iPhone at 13 percent, according to IDC.
"We know we need to accelerate. We're not confused about that," Ballmer told investors and analysts Tuesday. "We need to be a company that provides a family of devices."
Microsoft is betting that it can develop a more appealing line of Windows phones if the hardware and software are more tightly wound together. That's a concept that propelled the success of Apple's iPhone and iPad, whose operating systems are tailored specifically for those devices. Apple also maintains a rigid screening process for applications.
Hayes thinks Microsoft's Nokia deal is also similar to Google's $12.4 billion acquisition of Motorola Mobility Holdings, another struggling cellphone maker, completed last year. Like Microsoft, Google wanted to secure its own pipeline of mobile devices to serve as a showcase for its Android software and other online services.
Just like Google did with Motorola, Microsoft is also buying the rights to a portfolio of valuable mobile patents with the Nokia.
Microsoft's purchase price consists of 3.79 billion euros ($5 billion) for the Nokia unit that makes mobile phones. Another 1.65 billion euros ($2.2 billion) will be paid for a 10-year license to use Nokia's patents, with the option to extend it indefinitely.
The money to buy Nokia's smartphones and patents will be drawn from the nearly $70 billion that Microsoftheld in overseas accounts as of June 30.
The deal with Nokia represents the second most expensive acquisition in Microsoft's 38-year history, ranking behind an $8.5 billion purchase of Internet calling and video conferencing service Skype. Tony Bates, who ran Skype, is also regarded as a potential successor to Ballmer.
Although Google executives have insisted that they are pleased with Motorola Mobility's progress, analysts say it's still unclear if that deal will ever merit the steep price tag. Motorola Mobility has lost $1.7 billion under Google's ownership so far.
Some analysts are worried about Nokia becoming a financial drag on Microsoft. If the deal closes by early next year, as Microsoft expects, the company will inherit 32,000 Nokia employees. That will represent a nearly one-third increase in Microsoft's current payroll of 99,000 employees.
Microsoft believes Nokia will begin to increase its adjusted earnings during the fiscal year ending in June 2015. That projection hinges largely on Microsoft's hopes to sell about 50 million Windows-powered smartphones annually. Reaching that goal will require a roughly 40 percent increase from the current pace of Windows phone sales, based on IDC's second-quarter numbers.
Microsoft's expansion into mobile devices hasn't fared well so far. Last year, the company began selling a line of tablets called Surface in hopes of undercutting Apple's iPad. The version of Surface running on a revamped version of the Windows operating system fared so poorly that the company absorbed a $900 million charge in its last quarter to account for the flop.
"This is a logical step, but it's only a small step in the direction of having a more integrated approach to hardware and software," Golvin said of the Nokia deal. "The challenge for Microsoft is how to provide everything that customers want in a clear and unified way, no matter what device that customer might be holding, whether it's a phone, a tablet or an Xbox controller."
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Huuhtanen reported from Helsinki.