Microsoft gets less than $10 per Windows Phone unit

Microsoft gets less than $10 per Windows Phone unit

Summary: With financial predictions in tow, does Microsoft's bid to acquire Nokia make sense? By the numbers.

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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.

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. 

 

Screen Shot 2013-09-03 at 06.19.58

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. 

Screen Shot 2013-09-03 at 06.42.29
Credit: Microsoft

Patents

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:

Screen Shot 2013-09-03 at 06.41.55
Credit: Microsoft

 

Screen Shot 2013-09-03 at 06.51.25
Credit: Microsoft

 

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. 

Topics: The Microsoft-Nokia Deal, Microsoft, Mobility, Nokia, Patents

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18 comments
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  • How Can The Gross Margin Go Up?

    Previously it was getting royalty payments, now it's going to get nothing. And it's going to have to bear the entire cost of manufacturing these loss-making Lumia devices, which were Nokia's problem before.

    It's not win-win, it's lose-lose.

    Look for Ballmer's successor to put on another quick reorg to try to cover up the red ink...
    ldo17
    • They now get $10

      And they expect Nokia gets another $30 from hardware.
      You sum both numbers and you get $40 :-)
      Hardware is where the money is for smartphones, android destroyed software revenue.
      AleMartin
      • Re: And they expect Nokia gets another $30 from hardware

        But they haven't--they've been losing money from every Lumia sold.
        ldo17
        • Obviously they expec to change that

          And it's a legit wish. Mobile devices generate a lot of profit for many others.
          AleMartin
          • Re: And it's a legit wish

            Wishing is not having. Windows Phone has been a money-loser for everyone who touches it.
            ldo17
          • Sounds a lot like Android to me.

            The only one making any money is Samsung, after all.
            ForeverCookie
          • Re: The only one making any money is Samsung, after all.

            Have you noticed that LG and Lenovo are now making lots of money from Android? Even Sony, in the doldrums for so many years, is now profitable again, thanks to Android.

            I suppose it soothes the egos of the Microsoft boosters to keep insisting that nobody is making money from Android (after all, if Windows is doing so badly, how can Android be better?), but by now it just makes you look ignorant.
            ldo17
          • Source for Lumias being sold at a loss please.

            I think once again you are spinning information to fabricate a talking point that backs up what you desire to be true.
            Emacho
        • can you please back up your "statement"?

          I've read anywhere that Nokia is losing money on Lumias. Probably in your dreams. Please don't wake up.
          Ram U
          • I mean I haven't read.

            ZDNet please bring back "stupid edit" button.
            Ram U
      • Not it at all

        MS has been paying Nokia a subsidy to make Windows Phones exclusively. They will now no longer be paying that subsidy.

        So, Nokia had to sell X number of Windows Phones before they exceeded the subsidy and actually had to *pay* MS to sell any more. Apparently, they had just gotten over that threshold and were now paying MS what ammounted to $10 per phone. But, eliminate the subsidy and put that back into MS' pocket, and you get to $40. Maybe there's a little room for hardware profit, as well.

        But MS needn't make any money on the hardware. Indeed, they may even be able to sell at a loss, because MS expects to sell applications and services to WP users. Profits from these, too, are likely included in the $40.
        x I'm tc
    • Nokias Windows Phones have always had a good

      profit margin. There have been trolls on here making untrue claims about them losing money but nobody with a brain was fooled by them. Even as the trolls continuously repeated their ridiculous lies no one has believed a word of it but they're so desperate in their wishful thinking to see Windows Phone fail that they just can't admit to the reality of it steadily gaining share and in many countries moving ahead of iPhone already.
      Johnny Vegas
      • Nokia last results (rounded values)

        2012 Q1, €-400m
        2012 Q2, €-800m
        2012 Q3, €-600m
        2012 Q4, €400 (Note: they sold the headquarters during this quarter)
        2013 Q1, €-150m
        2013 Q2, €-100m

        Nokia smartphone share in 2009 was near 40%, 30% in 2010, 25% in 2011, around 5% in 2012. In 2013 is around 5% still - a bit less I suppose.

        Yes there are a lot of very pessimistic people, but while WP sales are going up, I don't see Nokia doing well.
        AleMartin
        • Re: Nokia last results (rounded values)

          And in 2010, they made €2.5 BILLION PROFIT.
          ldo17
          • And then there was Elop

            nt
            AleMartin
        • Unfortunately

          To get to that "Magical 3.9%" number, you have to add in WM 6.x, and WM 7.x. Sure Android and iOS use that to a limited scope, but no one's perfect. If Nokia was doing so well, why did their stock price drop to 14% of it's "Pre-Elop" value? Because it was Elop's job to deliver Nokia to Microsoft, and he did a great job, of nearly Bankrupting Nokia.
          Troll Hunter J
      • I've read Lumia's were being sold at a loss

        And Microsoft had paid $2 BILLION, to "help offset" Nokia's losses. If a phone cost, $175 to build, and you get it on "Buy one, get 4 free", and the subsidized price is $49.99. The Cell carriers are not taking a bath on those phones, the OEM is. Verizon is not going to shell out hundreds of dollars to make less than that. Just look at the "On contract" prices of Lumia Phones. On Verizon The two Lumia phones are Free w/2 year contract

        http://www.verizonwireless.com/b2c/device/smartphone

        On AT&T the 920 if Free w/2 year contract, while the925 is 99.99, and the bright yellow 1020 is closer to manufacturing cost at $299.
        http://www.att.com/shop/wireless/devices/smartphones.html
        Again the wireless companies are not paying full price for these phones, so someone is eating the costs.
        Troll Hunter J
  • Microsoft gets less than $10 per Windows Phone unit

    It makes sense. Microsoft is in the smartphone game for the long haul. They were successful in the past and with the incredible growth Microsoft Windows Phone is having they will be successful in the future.
    Loverock-Davidson