Microsoft said on Monday that it plans to acquire Nokia's devices and services unit for $7.2 billion, and claims that the buyout deal will improve and expand the potential of the Windows Phone market.
In an announcement, the Redmond giant said it was pressing ahead with closing the Microsoft-Nokia deal for approximately $5 billion. An additional $2.17 billion will be spent on licensing Nokia's patents -- a key factor in Microsoft's strategic rationale for making the purchase.
But does the acquisition make sense for Microsoft's future prospects in the device and services industry?
In a presentation titled "Microsoft’s strategic rationale for deal announced with Nokia on September 3, 2013" (.pdf), the tech giant has laid out its rationale over the purchase.
One brand, united voice
"Clarity will help the market for Windows Phones," the presentation says.
Microsoft wants to make the Windows Phone simpler and more cohesive as a product, and to do so, the firm says buying Nokia's unit will "accelerate innovation" and "reduce friction going forward, boost the pace of innovation and improve marketing efficiency."
These, in turn, will strengthen overall opportunity in the mobile device market, and allow a merger of services for consumers including interactive entertainment, connectivity, imaging and personal assistant technology.
Going beyond software and the dwindling PC market, Microsoft says that creating a family of devices that "best empowers people and business for the activity they love most" will ensure greater success in the smartphone market and for the firm's OEMS.
Redmond says that high-value services will be "key," highlighting geospatial technology and mapping technology especially in the wake of booming mobile device popularity. Microsoft believes that an effective alternative to Google's mapping technology is required in order to give consumers more than "one digital map of the world."
This is where HERE, Nokia's embedded mapping technology, comes in. The company says the acquisition will allow the service to be integrated within Microsoft's other core services, and as part of the deal, Microsoft now has rights equivalent to ownership of the Nokia navigation tool.
Under a new four-year agreement, Nokia will improve HERE applications for other platforms. In addition, Microsoft will pay the Finnish firm annually for mapping data, and the information will be syndicated to customers using Windows Azure for additional payment.
Microsoft plans to combine Nokia's mapping data with other sources.
The Redmond giant states that the company needs a "first-rate" Microsoft Phone experience for users, and while the company's services will still be available for Android-based devices and the iPhone, Redmond says it "cannot risk Google or Apple foreclosing app innovation, integration, distribution or economics." In other words, unless Microsoft ups its game, Google and Apple are going to remain the dominant forces within the application industry -- and the company's mobile sales and reputation will suffer because of it.
As a result, Microsoft has also promised to take additional steps to promote the Windows Phone app ecosystem in the future.
- Also read: Microsoft to buy Nokia's devices, services unit for $7.2B | Microsoft-Nokia deal: 11 quick facts | Elop drops Nokia CEO role to lead devices team under Microsoft deal CNET: Ballmer's e-mail to Microsoft employees about Nokia deal | Microsoft makes its Apple move, bringing Nokia and Elop into the fold
Phone shipments, future prospects
According to Microsoft, the Windows Phone has a 10 percent share in nine markets, and outsells BlackBerry models in 34 markets -- equating to a 78 percent year-on-year growth.
Nokia accounted for 81.6 percent of all Windows Phone smartphone shipments during the second quarter of 2013.
Why Nokia's unit?
Within the company's disclosure, Microsoft says that as the deal is being financed through offshore cash reserves, there will be no material impact on shareholders.
In addition, Microsoft says that intellectual property and patent licenses have material investment value, and the deal will eventually bring about "improved unit economics" and "long term value creation," rather than maintaining the current licensing deals and relationship with Nokia -- an agreement that may be scuppering Microsoft's chances of properly entering the smartphone space.
Redmond also believes that taking over Nokia's devices and services unit will provide "entry in to key growth markets."
Microsoft says that the current partnership between itself and Nokia means that for every Windows Phone sold, the gross profit margin is under $10 per unit based on royalty payments. Through the Nokia unit acquisition, Microsoft believes this will increase to $40 -- potentially making the risky deal a profitable force in the future.
Under the terms of the patent and IP agreement with Nokia's devices and services unit, Microsoft is acquiring 8,500 patents, ownership of the Asha and Lumia brands and a 10-year license to use the Nokia brand on feature phones.
In addition, Microsoft is paying $2.17 billion for licenses to use all of Nokia's utility patents, a collection the tech giant believes is "one of the two most valuable portfolios relevant to wireless connectivity" currently on the market. Microsoft says the purchase represents "significant value" for the firm's existing businesses as the deal will replace Microsoft's annual license payment to Nokia.
As part of the deal, Nokia is signing over its existing license with Qualcomm and conveying rights with IBM, Motorola Mobility and Motorola Services.
The financial impact
How is the deal expected to impact Microsoft's balance sheet in the near future? The company's predictions are below:
So, how do things stand by the numbers?
- Microsoft is spending about $5 billion (€3.79bn) on Nokia's devices and services unit, using offshore cash to prevent impacting shareholders. Microsoft will make available to Nokia about $1.97bn in financing in form of three payments of €500 million ($659m) from oversees resources.
- An additional $2.17 billion (€1.65bn) is being spent on licensing Nokia's patents.
- Nokia's patent portfolio includes 8500 design patents and roughly 30,000 utility patents.
- By purchasing licenses, Microsoft is also taking on Nokia deals with Qualcomm, IBM and Motorola Mobile among others.
- Microsoft says that Windows Phone has at least a 10 percent share in 9 markets.
- Microsoft says that Windows Phone is outselling BlackBerry models in 34 markets, a year-on-year growth of 78 percent.
- Microsoft makes less than $10 per Windows Phone shipped, but expects this to rise to over $40 after the deal is finalized.
- Nokia accounted for 81.6 percent of Windows Phone shipments in Q2 2013.
- As part of the deal, 32,000 Nokia employees are expected to transfer to Microsoft, including 4,700 in Finland, where Nokia is based.
- Nokia chief executive Stephen Elop will lead the Nokia division under the leadership of Steve Ballmer.
Microsoft hopes the deal will be approved by regulators in 2014.