Welcome
...to our Great Debate. This week, we're arguing whether Microsoft should buy Nokia - or not. Are the debaters ready?
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Should Microsoft buy Nokia?
Two years ago, Nokia ditched Symbian and adopted Windows Phone. What's next for these mobile partners?
Jo Best
Win-Win
or
Lose-Lose
Ben Woods
Best Argument: Win-Win
Audience Favored: Win-Win (56%)
The moderator has delivered a final verdict.
Opening Statements
A necessary move for both
Jo Best: For the first time, last quarter saw more smartphones sold than feature phones. Nokia once had the smartphone market it in the palm of its hand, but lost its lead after being outpaced by nimbler rivals. Microsoft never had any lead to speak of, having steadfastly failed to translate dominance of desktops into anything substantial on the smaller screen.
Now, Microsoft and Nokia are a long way behind Apple and the Samsung-Android duopoly, with both their futures tied to Windows Phone, an operating system with six percent market share. While Microsoft buying Nokia might not reinvigorate the OS' fortunes, it's still a necessary move for both.
For Nokia, being acquired by Microsoft would buy it time to build up Lumia shipments, and for Microsoft, it offers a means of keeping Nokia from being wooed to another operating system – the only major handset maker to keep faith with Windows Phone. When Nokia adopted Windows Phone and ditched Symbian, many thought it was laying the groundwork for just such an acquisition. It made sense then, and it makes even more sense now.
Not today, not tomorrow
Ben Woods: Nope, not today, not tomorrow – there's no way it makes sense for Microsoft to buy Nokia.
It already has as much as it could hope for out of the company in its partnership with Nokia around Windows Phone 8, and even though Microsoft makes support payments to Nokia, it's an agreement that is already now seeing the software maker taking a net gain from its deal with the the Finnish handset maker.
What exactly would it gain from buying Nokia? The most valuable part of the company could well be the patents that it holds by the time Microsoft would get close to considering such a deal, but even then it's likely to be a defensive, rather than offensive, move.
While Windows Phone struggled to gain traction when it was first introduced in the marketplace, it is now slowly gathering pace. Putting all its eggs in a Nokia-branded basket would be short-sighted, at best.
The Rebuttal
Great Debate Moderator
I'm ready
Jo Best
I am for Win-Win
All set here
Ben Woods
I am for Lose-Lose
Great Debate Moderator
Most needy
When the deal was first made between Nokia and Windows Phone two years ago, who needed it more and why?
Posted by Jason Hiner
Microsoft
It's difficult to make the call objectively given all that's happened in the last two years, but at the time, I'd say Microsoft needed the deal more. Nokia at the time was still the biggest handset maker shifting hundreds of millions of feature and smartphones, had an alternative to Symbian in the form of MeeGo, and was a brand name to be reckoned with in both mature and emerging markets. Sure, it had suffered at the hands of Android and Apple, but it was still a huge force in mobile. It knew it to make a bold move if it wanted to keep on top, but Microsoft wasn't its only option.
Microsoft, however, had released Windows Phone a year previously and while it had persuaded a handful of mobile makers to use the OS, none of the devices they brought out set the world on fire. The initial Windows Phone lineup - Dell Venue Pro, the LG Optimus, the HTC HD7, HTC Mozart, HTC 7 Trophy, and the Samsung Omnia 7 – was not an august one, and even those makers' interest in the operating system was on the wane. Microsoft needed a big partner, or would have to watch its mobile dreams go the way of Windows Mobile for second or third time.
Nokia was at the head of the Premiership, Microsoft was looking on from the mid-table of Conference (note to US readers – that's a football metaphor). There's no doubt Microsoft needed the deal more.
Jo Best
I am for Win-Win
Neither
You could really argue this one either way. At the time of the deal, Microsoft needed it more than Nokia, as a result of dwindling market share and quickly ageing Windows Mobile platform.
On Nokia's side, the company was actually doing okay – better than its performance on paper since, at least – but its outlook wasn't great at the high-end of the market. While Nokia fans will (and loudly have) bemoaned the switch away from Symbian as its primary smartphone OS, it too was quickly ageing, and despite shipping in huge volumes was getting left behind by its rivals in usability and ecosystem stakes.
Ben Woods
I am for Lose-Lose
Great Debate Moderator
Who benefited more?
Looking back, who has benefited more from the deal, Nokia or Microsoft?
Posted by Jason Hiner
Again, Microsoft.
Under Windows Phone's stewardship, Nokia's market share has dropped and Lumia sales have failed to reach the heights that its Symbian range once did. For a while, Nokia was at least benefiting financially from the pair's arrangement with Microsoft agreeing to pay Nokia for using its OS. Those payments are now at an end, and Nokia is giving Microsoft a licensing fee of around €500 million ($776 million) a year.
Windows Phone has a tiny percentage of the smartphone operating system market – around six percent – but without Nokia, it would have an even smaller chunk. It's difficult to get a handle on how much of Windows Phone devices sales are Nokias, but around 80 percent seems to be a fair guess, leaving it with just over one percent share. Ouch.
The next biggest Windows Phone maker after Nokia is HTC with 14 percent of Windows Phone sales, and I doubt Microsoft wants to be pinning its hopes on them being a long-term prospect right now.
With Nokia on board, and the company's future doubtless tied to Windows Phone's for some years to come, Microsoft has the security that Windows Phone will remain a contender, albeit one fighting for the scraps from Apple and Samsung's table.
Jo Best
I am for Win-Win
Too early to tell
I think it's still a bit early for looking back. Both companies have benefited so far, but neither one to any great extent. Nokia has provided a solid, reliable stream of new Microsoft-based hardware, which helps Microsoft get started on gaining market share.
From Nokia's viewpoint, it now has a smartphone platform for the future that can (just about) compete with the current crop, and to sweeten the deal it also receives $1bn per year from Microsoft. However, Lumia sales are now for the first time taking Nokia over the threshold where it actually pays more in licensing than it receives in platform support – which is a good thing, as it means its phones are now selling.
However, there has been considerable backlash from the press and smartphone buying public over Nokia's decisions and despite its flagship launches receiving largely favourable reviews it has failed to score that one 'hit' phone. As it stands right now, Microsoft has benefitted more.Ben Woods
I am for Lose-Lose
Great Debate Moderator
Does the public care?
From a purely product standpoint, have Microsoft and Nokia successfully partnered to create competitive smartphones that the public wants to buy?
Posted by Jason Hiner
Not by the numbers
If I was being glib, I'd say the numbers would suggest not.
However, Lumias are doing well in some markets – a fact Microsoft hasn't been shy of trumpeting at every opportunity – and the lower-end Lumia 520 and 620 have been well-received. With the latter two devices, Microsoft seems to hit the right price point, offering a solid smartphone to those who might not want to pay top whack but still want a smoother experience than a low-end Android might deliver.
But it's with those that do want to pay top whack that the Microsoft-Nokia tag team appears to be struggling. The higher-end 920 and 820 have met with decent, if not spectacular, reviews but don't seem to be shifting in large enough volumes to worry Apple or Samsung. More high-end Lumia handsets are on the way, so there should be some more news on that side of things in a couple of weeks' time.
Jo Best
I am for Win-Win
There's potential
From a purely product standpoint, Microsoft and Nokia have partnered to create competitive smartphones that the public should want to buy. Running the Microsoft OS at least makes Nokia stand out (rightly or wrongly) and there are some nice touches in the software. That said, apps are still lacking and the OS isn't as refined in some areas as the competition.
On the hardware front, Nokia has continued to do what we all know it can do: build solid, reliable, well-designed hardware. Whether you liked the look of the first or second generation Lumia's or not, you can't say they look like every other phone on the market.
However, Nokia has essentially been tweaking old chassis designs and putting new hardware inside, thus far and while in some examples it's ahead of the curve (wireless charging and cameras, for example) it still hasn't released a Windows Phone that could be described as sleek.Ben Woods
I am for Lose-Lose
Great Debate Moderator
Better off Android?
If Nokia had also (or instead) made a deal with Google to become an Android vendor, would it have been better off today?
Posted by Jason Hiner
Impossible question
It's pretty much impossible to say whether Nokia would have been better off as an Android shop or not, but it's worth highlighting that Samsung is pretty much the only vendor making serious money off Android smartphones – other Android handset makers are getting low single digit market share.
If you're optimistic, you could say that Samsung proves you can shift units using a commodity operating system without your own dedicated app store (let alone your own apps) – its differentiation has been based around hardware and branding, both areas Nokia has traditionally been strong on. Nokia also has the added advantage of having its own software efforts to help differentiate itself from other players that use the same OS – perhaps something that would have helped it if it had chosen to go Android.
If you're pessimistic, you would have to point out that every other Android seller bar Samsung is having a tough time of it, and if Nokia had gone down that route, it would have lost the considerable cash Microsoft has stumped up to sweeten the Windows Phone deal. In short, a deal with Google could have gone either way for Nokia.
Jo Best
I am for Win-Win
No
No, it would be dead or dying. Perhaps Microsoft (or someone else) would already own it but either way it would have been the wrong move.
Look at the current state of the market for other Android makers, it's only really Samsung that's had real success delivering handsets that use the Google OS. Nokia could easily have taken a similar route as HTC (incidentally, one of the other few Windows Phone makers – so it likely could see this issue looming large, too) but it would likely be struggling to stand out from the crowd in the same way LG, Motorola, HTC or any number of other handsets makers are currently.
The companies that are surviving are the ones that set themselves apart through software and services, and while Nokia is getting better in this area, it's strength has historically been in hardware.
Ben Woods
I am for Lose-Lose
Great Debate Moderator
The right choice?
If Microsoft hadn't signed its deal with Nokia, would it have been better off by strengthening partnerships with Samsung and HTC?
Posted by Jason Hiner
Limited opportunites
The question implies that either would have been interested in a deal in the first place. I doubt Samsung would have bitten – its Android devices have been flying off the shelves, and it's been pumping out a Google-powered device per week. Its Windows Phone efforts have been somewhat more muted, with a device here and there, and smack more of appeasing Microsoft than any obvious interest in the platform.
Would HTC have gone for it? More likely. HTC's been having a hard time of it of late, and could possibly have been swayed by the offer of financial and marketing support that a deal with Microsoft would have brought. Would that partnership have worked out better than the one with Nokia? Unlikely. HTC doesn't have the history of innovation that Nokia does, nor the reach, nor the same heavyweight brand. Perhaps a Microsoft agreement would have helped it stabilise after a run of bad results, but it's unlikely that it would have brought Windows Phone the market share that Microsoft craves.
Jo Best
I am for Win-Win
It's not clear
It's hard to guess at where the smartphone market might be now if things had been done differently, and with the benefit of hindsight and Samsung now leading the charge among Android handset makers it would be easy to say partnering with Samsung would have been the right thing to do.
Let's not forget, Samsung (and HTC) still makes Windows Phone handsets but it doesn't seem to have led to any great impact on the platform as a whole or a surge in sales of the devices, so it'd be strange to think of it having a greater effect if Nokia was out of the picture.
That said, if Nokia wasn't around Microsoft would still have needed to partner with someone to give Windows Phone any chance.
Ben Woods
I am for Lose-Lose
Great Debate Moderator
Nokia's shaky future
Nokia is obviously struggling financially. How badly does the company need a merger or an acquisition over the next year in order to survive?
Posted by Jason Hiner
Nokia wouldn't agree
Is it? Nokia would dispute the Chicken Licken projections of doom that lazy hacks like to project onto it, and I'd counsel also a more balanced view of the company's financials are needed.
Sure, its last five years of financials show it move from profit to loss, but that's against the background of a massive change in strategy (Symbian, MeeGo, Meltemi to Windows Phone), operations (30,000 job cuts, selling its HQ, cutting business units) and economic climate (a nasty, ongoing recession). It's far from impossible that Nokia can reverse that trend once its weathered those storms, and its latest set of quarterly results show its already turning things around to some degree, cutting its operating loss by 90 percent year on year. It's also still got €4.5bn of cash in the bank, so it's in no need of a rescue in the next year, or even the year or two after that. It's also working solidly at expanding beyond the world of mobile phones, into services – a canny play that will benefit its bottom line.
Of course, it's not all kittens and candy floss. Lumias haven't reached Symbian shipment levels and its Series 40 devices are having a sales wobble. There's no doubt Nokia can survive, grim financials or not. Whether it can survive as anything more than a mid-tier player known for the illustrious history behind it is another matter.
Jo Best
I am for Win-Win
Problems are exaggerated
While it's no Samsung or Apple right now, the company isn't struggling as much financially as some reports might have you believe, with more than €4 billion ($6.21 billion) cash in the bank there's no immediate concern of needing a buyout in the next 12 months.
Things could look very different a year or so from now though, if it fails to rectify or replace the cash it has previously received from its activities at the lower end of the handset value scale - it really has been this that has kept the Finnish handset maker lumbering along. Its Lumia sales are now improviing, but the question will be whether they can rebound fast enough to make up the difference.
Ben Woods
I am for Lose-Lose
Great Debate Moderator
Why team up?
What are the other key factors that are pushing Microsoft and Nokia toward a buyout that would make the Finnish phonemaker part of Microsoft?
Posted by Jason Hiner
Cheap pick up
Its shareholders, for one – after seeing their dividend dwindle to nothing over the last few years, I'm sure they'd relish the chance to make some cash off their investment.
A buyout right now also would give Microsoft a chance to pick up Nokia for cheap, and put a nice pair of golden handcuffs on the company to stop its head being turned by Android, Tizen, Sailfish, Firefox, Ubuntu or any of the growing number of mobile OSes that are making the smartphone operating system market both more interesting and more competitive.
With PC sales heading south, Microsoft has clocked that it needs to step up its tablet and mobile efforts. It's already made some tentative steps in that area with its Surface line, and there's the promise of more to come from the range. Having a pet hardware operation would Microsoft help in that respect, but it would also help Nokia too: getting into the tablet business – which it has so far shied away from doing – would offer it a way of expanding into a segment that is growing viciously and moving away from domination by a duopoly. That's not something you could say about the mobile market right now.
Jo Best
I am for Win-Win
Bottom line
Pressure from stockholders is one factor that could pressure Nokia into entering willingly into a merger or acquisition from Microsoft (or anyone).
Another factor that could play a part in a buyout, which could again be in part due to pressure from shareholders, is the need for both companies to make more of a splash in the tablet market than either are doing. However, one and one doesn't always equal two, so putting a decent hardware manufacturer with a decent software maker isn't necessarily going to turn out a tablet that's a financial success. Nokia has been wise to resist the pressure to release a tablet before now.Ben Woods
I am for Lose-Lose
Great Debate Moderator
A boost to Windows Phone?
How would a Microsoft buyout of Nokia make Windows Phone more competitive in the smartphone market?
Posted by Jason Hiner
Possibly
I'm not altogether sure it would. It would possibly make Nokia and Microsoft more competitive in the smartphone market, by encouraging tighter integration and joint product roadmaps.
However, by guaranteeing at least one big name continues with Windows Phone through a Nokia acquisition, it may risk putting off the other manufacturers that have signed up to use the platform – when Microsoft similarly forced hardware partners to compete directly with it when it launched the Surface tablets, it didn't meet with a warm reception.
Where it might make a difference is in the low-end. Microsoft may get a little tired of Series 40 in the longer term, bumping it in favour of going after Series 40's emerging market territories with its own offering: a stripped back, lower cost Windows Phone OS maybe. It's been said that Windows Phone itself is the most expensive component of a Windows Phone bar the screen – so bringing costs down would make it more appealing to handset makers in a shot.
What's more, Android is expanding in the sub $100 market, but it's not always been a pretty experience there. If Microsoft can play its cards right, keep Windows Phone costs low – and bringing Nokia in-house would help with that – the OS stands to benefit in emerging economies.
Jo Best
I am for Win-Win
No difference
A buyout would provide stability, or at least the illusion of it, for Nokia's future which some people doubt as things stand right now.
I don't believe it would make the Windows Phone platform more competitive in the market, it would have the same number of hardware makers on board, it would have the same level of opportunities for integrating core services into the hardware. It simply wouldn't make any difference to Windows Phonesmartphone market share for Windows Phone.Ben Woods
I am for Lose-Lose
Great Debate Moderator
Biggest loser
Who has the most to lose in a Microsoft buyout of Nokia, and why?
Posted by Jason Hiner
Nokia
I'm not sure either has a huge deal to lose, but perhaps Nokia will see its situation change the most. Acquirees tend to see 'synergies' that result in job cuts, and Nokia has already seen quite a few of those already.
Microsoft has nothing to lose but a few billion – and it can spare them – while Nokia has nothing to lose but its autonomy (and some would argue with an ex-Microsoft exec in charge and a multi-year deal to use Windows Phone in place, it doesn't have a huge degree of that right now anyway.)
Bar Xbox, Microsoft has historically not had a great deal of success with hardware, and mobile hardware in particular. Nokia will doubtless be hoping, under an acquisition, that it will be rubbing off on Microsoft, not the other way around. Industry watchers may point to Palm-HP as a sign of what can go wrong, but Microsoft has too much at stake with mobile to let Nokia go the way of WebOS.
Jo Best
I am for Win-Win
Definitely Nokia
Nokia clearly has most to lose in any such deal. If Microsoft bought Nokia it still has the breadth of the rest of its business to rely on in the event that it all goes belly up. What would Nokia have in that situation? It would be tied to a platform that had already proved itself unable to compete. And if Microsoft bought Nokia and made Windows Phone a market leading success, Nokia as a business would likely miss out on a lot of the benefits that could provide, if it was a standalone company.
Nokia would also lose its heritage as a stand-alone company – it hasn't always been 'just a Windows Phone maker' and Finland would probably lose its sizable contribution to GDP that Nokia brings in. Add in the patents that it still holds – again, not an inconsiderable consideration considering how much R&D you can get done in nearly 150 years, and Nokia would clearly be on the losing end of any such deal.Ben Woods
I am for Lose-Lose
Great Debate Moderator
Last question: The dangers of doing nothing
What's the danger of the two companies not doing a deal and simply forging ahead under the current partnership?
Posted by Jason Hiner
Nothing ventured, nothing gained
As the adage goes, if you always do what you've always done, you'll always get what you've always got. So, if Nokia and Microsoft carry on as they have done over the last couple of years, they'll be scrapping over third or fourth place in the smartphone market – a place neither of them relish being.
Jo Best
I am for Win-Win
Needs excitement
The danger for Nokia of the two companies ploughing ahead as they are is that Windows Phone fails to ignite or excite the mobile market any more than it already has done – and it really hasn't yet. In this situation, Nokia's future is tied to Microsoft's OS for the foreseeable future so if it tanks, Nokia tanks.
However, while we don't know the terms of the deal (in respect to the duration) Nokia would still have the option of extricating itself from Microsoft and opting for a different platform, as long as it can survive that long. There's no reason, even with the deal in place, that it is obliged to build Microsoft-based tablets and spreading its products across different platforms isn't something the company has completely written off.
The same factor is likely the biggest danger to Microsoft too: there's very few hardware makers building new Windows Phone partnerships and its two highest profile releases have come from Nokia and HTC, rather than Samsung or Huawei –which both build Android handsets too. If Microsoft loses Nokia, it loses any chance of making any impact on the mobile market in the coming year or two.
Ben Woods
I am for Lose-Lose
Great Debate Moderator
Thanks to everyone
We definitely had a Great Debate.
I should have pointed out earlier that both Jo and Ben are stationed at ZDNet UK in London which accounts for the extra "s" instead of a "z" on occasion, € signs, and "Chicken Licken" references.
Come back for the final arguments to be posted on Wednesday and my choice for the winner which will be posted on Thursday. Please talkback and vote for your choice.
Posted by Jason Hiner
Closing Statements
A marriage made in heaven
Jo Best
If reports are to be believed, investors have had enough of Nokia CEO Stephen Elop's strategy for the company. Who can blame them? Shareholders don't care about hardware choices or operating systems, they care about cash, and Nokia has delivered decreasing amounts of that of late. If Microsoft was in the market for a Nokia buyout, it would be a good time to start waving its checkbook around. With shareholders so disgruntled, it could pick up a bargain.
For a few billion, it could pick up all that hardware expertise, a solid partner for Windows Phone, presence in emerging mobile markets, sizeable R&D functionality and some nice consumer offerings to fix up Bing with. Microsoft meanwhile would just have to deliver two things to make its offer appealing for Nokia: enough cash and enough patience to safeguard the handset maker's future.
The two companies have been moving closer and closer even before the Windows Phone deal - a buyout would just be the consummation of a marriage many have long expected.
A huge mistake
Ben Woods
Microsoft buying Nokia would be a mistake, it really doesn't need to and can only result in a lose-lose situation. Neither company name is doing well in driving demand in the mobile market – I'd bet the last time you heard someone go into a shop and specifically ask for the latest Nokia phone was a fair while back, and while (as Jo argues) a deal might provide some synergies, Microsoft is really getting all it wants and needs out of this deal, without being responsible financially and reputation-wise to what happens to a brand such as Nokia. Even buying it for the patents could end up being a dicey move - think about Google's purchase of Motorola, a similar move which has since seen many of the patents declared standards-essential, meaning other manufacturers rely on using them too under fair licensing terms.
The expression 'Why buy the cow when you get the milk for free?' springs repeatedly to mind whenever I think about this deal.
Microsoft is already getting as much as it needs out of the deal, buying the company exposes it to more risk, rather than more opportunity, and as long as Windows Phone can perform for Nokia, there's no reason to buy the company as a defensive move to stop it jumping ship to another platform. If Windows Phone can't perform well with the backing of a handset maker like Nokia, buying the company won't fix it as the problem won't be who manufactures the handset it'll be the software inside and the user experience, which, once again, wouldn't be helped by buying Nokia.
Why buy the cow when it's already paid for the milk?
Jason Hiner
This is one of my favorite debates that we've done as part of the Great Debate series because Jo and Ben both know the topic so thoroughly and have such widely divergent perspectives on it. Because they both argued their side so well, I've admittedly gone back and forth several times in terms of which one makes the stronger case.
In one sense, I'm not sure why Microsoft would buy the cow when it's already paid a billion dollars for the milk. But, with Surface, Microsoft has shown that it wants to make its own branded devices but that it's not exactly an expert at it. Buying Nokia would give Microsoft a huge shortcut. From Nokia's standpoint, its brand has lost some of its luster but it still has a center of excellence around mobile hardware and becoming an arm of Microsoft would allow it to focus on what it does best. With that in mind, I'm going to give Jo the nod on this one.
Posted by Jason Hiner