Microsoft's Acquisition of Nokia: Will the Gamble Work?

Microsoft's Acquisition of Nokia: Will the Gamble Work?
Case Code: BSTR455
Case Length: 21 Pages
Period: 2011 - 2013
Pub Date: 2014
Teaching Note: Not Available
Price: Rs.500
Organization: Microsoft Corp., Nokia Corporation
Industry: Smartphones
Countries: Global
Themes: Acquisition
Microsoft's Acquisition of Nokia: Will the Gamble Work?
Abstract Case Intro 1 Case Intro 2 Excerpts


About Microsoft Corporation

The history of Microsoft Corp. (Microsoft) dates back to 1975 when Harvard University dropout, Bill Gates (Gates), established Micro-soft in a hotel room in Albuquerque, New Mexico. Initially, Gates, together with high school friend Paul Allen (Allen), developed a version of BASIC, a programming language. The duo sold the modified version of the software to other companies.

In 1979, Gates shifted Micro-soft to his hometown Seattle. In 1980, IBM Corp. selected the firm, which by then had been renamed Microsoft, to develop the operating system for its new computing machines. Later, Gates purchased QDOS (Quick & Dirty Operating System) for US$ 50,000 from a programmer. He called it MS-DOS (Microsoft Disk Operating System). In 1983, Allen resigned from Microsoft on health grounds....

The Challenge

Traditionally, Microsoft had been a software and services company with no presence in the hardware segment. Despite being a huge name in the technology sector, it started facing problems since consumers were moving from traditional PCs and laptops to tablets PCs and smartphone devices. To cater to the consumer demand, the software giant launched Surface tablet PCs in 2012. However, the launch received a poor response as consumers felt that other companies such as Apple and Lenovo had better offerings.

Not only did Microsoft not achieve much in the way of results with its tablet PCs, but its share in the mobile operating system (OS) market was also shrinking due to stiff competition from Google's Android 29 and Apple's iOS 30 . Some critics pointed out that the software giant was also slow in responding to the booming market for mobile devices.

Forging a Strategic Alliance

In a bid to turnaround Nokia's fortunes, Elop took the important decision to replace Nokia's Symbian OS with Microsoft's new Windows Phone OS as the primary OS for Nokia's high-end smartphones. Hence, on February 11, 2011, Nokia and Microsoft entered into a strategic alliance to build a new mobile eco-system. With Nokia gradually migrating away from the Symbian OS to Windows Phone, industry analysts hoped that Nokia Windows Phones would offer a compelling alternative to prospective smartphone customers.

As per the deal reached, Nokia would pay royalties to Microsoft for using its OS in its smartphones. Microsoft paid Nokia US$1 billion for developing and promoting Windows Phone smartphones. Under the deal, Nokia could continue to develop and use many important applications like its own mapping software in its phones. News of the alliance received mixed reactions from analysts and industry observers. Some analysts criticized Nokia for its selection of the Windows Phone OS instead of Android....

The Synergies

By acquiring Nokia's Devices & Services segment, a major goal for Microsoft was gaining access to the hardware platform for its mobile phone software. The company was optimistic that acquisition of Nokia's handset division could speed up development on its Windows Phone platform. It was reported that for the FY ended 2012, Nokia Devices & Services segment had generated sales of € 14.9 billion, accounting for 50 percent of Nokia's revenues.

Experts stated that acquiring Nokia's Devices and Services segment gave Microsoft an opportunity to execute its strategy for its Windows 8 and Windows Phone operating systems in a more vertically-integrated way, similar to Apple's business model for iOS devices...

The Response

The acquisition received mixed response from several quarters. Some industry analysts felt that Microsoft would benefit from the acquisition. Of late, Microsoft had been struggling as consumers had transitioned from desktop and laptop PCs to mobile devices. While its Windows software was used on a vast majority of PCs, the company had little presence in the rapidly growing segments of tablets and smartphones. According to Roger Kay, analyst at Endpoint Technologies Associates, "Microsoft has clearly been on the wrong track for a long time. Essentially Microsoft missed the shift to high mobility entirely." However, Ballmer said that Windows Phone was the fastest growing platform, growing by 78 percent in 2012.....

Will the Gamble Work?

In December 2013, the European Commission and the Department of Justice approved Microsoft's acquisition of Nokia's wireless devices. In case the transaction was terminated because of failure to obtain regulatory clearances, for instance, Microsoft would have to pay US$ 750 million as termination fee.

Some analysts felt that the deal was essential for Microsoft. According to Ben Wood, an analyst at telecom consultancy CCS Insight,"It's a necessary gamble by Microsoft to break into mobile, but given its complete reliance on Nokia for Windows Phone devices and the competitive position of Apple and Google with rival phone platforms an understandable move. It completely reshapes Microsoft's business pushing it firmly into hardware. But it also raises big questions about the sustainability of other firms, including HTC and Blackberry, remaining pure-play phone makers." They felt that the deal was necessary for Nokia too as it did not have the financial muscle to compete with Samsung and Apple....


Exhibit I: Competition in the Global Smartphone Operating System Market
Exhibit II: Nokia's Income Statement
Exhibit III: Microsoft's Income Statement

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