Microsoft / Nokia Acquisition

Shockwaves hit the IT industry when Microsoft announced that it was acquiring Nokia’s Devices & Services business unit on September 3rd. It has been a long debate if or when that would happen, and now that it really did happen; it’s time to look at the effects for the whole mobile industry in Finland. Let me start of by saying that I have no special insider information, but all the observations and conclusions come from my experience and understanding of these two companies since ‘96.

Why did Microsoft acquire Nokia?

There’s a very clear reason why Microsoft acquired the Nokia D&S business unit, and that is part of it’s new strategy to be a devices and services company. Microsoft wanted to enter the consumer markets fir a long time already, with brands like Xbox, Zune, Kin, Surface, Kinect, PixelSense and the list goes on. Some of those failed miserably, but some made a huge impact on the industry, and are taking things to the next level for the consumer, like Kinect. Also, shortly after the deal, Microsoft sees increased profit from sales of the Nokia Windows Phone from < 10 $ /unit to > 40 $ / unit.

But there have been plenty other reasons, which can shed light to this acquisition. First of all, there have been rumors for roughly a year, of Microsoft doing their own prototype Surface phones. Frankly speaking, I believe it to be true; it would make sense in case the Nokia acquisition would have failed. Another major factor has been an uneasy tone in the Nokia/Microsoft relationship. Both sides were hiding information from each other and weren’t always working together. That has led to the situation where both parties had a different focus when it should have been the same. There have also been transactional costs when two separate entities had been doing the same thing, which this deal puts now aside.

What did this mean for the industry?

All this together meant that the Windows Phone was not getting the focused commitment it deserved to break big. Nokia didn’t have the capability for required big investments to make an impact on mobile markets. With Microsoft, that’s going to change. People working closely with Nokia have seen the heavy cuts in R&D and other areas as well for several years. That’s not a way to grow a business, that’s battle for survival.

Let’s approach the consequences from three different perspectives – what will happen to the phones, what will happen to the workforce and what will happen to the economy and IT industry in Finland.

A transition from “phones” to smartphones!

First of all, if we think about smartphones in general, they have become more than just a device to make calls. Phones of today are like information and entertainment hubs for their users, really connecting people in a way no one could imagine in the past. Nokia didn’t believe it, but Microsoft has built a vision around it.

Microsoft has a clear vision, called “three screens and the cloud”, where it unify the experience across phones/tablets, PCs and TV through Xbox, those being the devices. The services part would be the cloud, in which Microsoft is investing heavily. The new datacenter, which will be built in Finland, is part of this vision. Now, they’ve got all device categories covered with their own products after the purchase of the Nokia D&S business unit, which in retrospective was a clear path.

Nevertheless, Microsoft did not buy the right to use the Nokia brand for smartphones, so they need to sell them under a different brand than the feature phones. They can still use their feature phones under the Nokia brand for some years. It would be quite sensible to use the Lumia for the Windows Phone brand, as it’s already somewhat known and has a good ring to it. Same logic applies for Surface –tablets, where the Surface brand is very visible and whereas the Microsoft brand is only mentioned on a side note. Present Nokia tablets will probably be cancelled or moved to the Surface brand.

The feature phones will probably have a more volatile future than the smartphones. It’s hard to see a long-term investment of Microsoft in S40 development. They might either try to downgrade the Windows Phone, or use another other operating system, which is readily available. Microsoft is run on the basis of maximizing profits, and not on a stubborn believe in a certain technology, so even radical changes can happen in this field.

Regardless, it’s still difficult to imagine that they would want to run that business down, as emerging markets have been profitable. Microsoft definitely wants to be present there and build brand loyalty. Mexico for example has a high market share growth with Windows Phones, and many other emerging markets are following the same trend with people getting their first smartphones ever.

Now that there’s much less hassle bringing the phones to market, and sharper focus on developing the platform, the Windows Phone has a more promising future. Traditionally, Microsoft hasn’t done a very large horizontal catalog of competing products. That will make it questionable how many different phone models they’re keeping on the market.

What’s next?

When the next Windows Phone major release will hit the markets roughly around Q2/2014, we’ll see the real effects of the new organization. A new phone will prove the capability of the new acquisition to produce competitive products. An increased investment capability of the Microsoft new Phone unit will most likely manifest itself with more promotions for its products.

The market share of the Windows Phone has grown steadily. Unfortunately, Nokia has hindered the growth with its delivery capability limitations. Nokia has defended itself by claiming that this happened due to the selected strategy of not wanting to build big stock. Microsoft on the other hand has an edge that it can push out a lot more units, since it can take the financial gamble, which Nokia couldn’t.

From a technical point of view, the Windows Phone’s future looks bright. There are clear hints that Microsoft is pushing their unified ecosystem to make it even stronger. One possible outcome could be that Windows Phone and Windows RT is going to merge at some point. The lack lustering HTML support on the phone development side is most likely fixed within the next major release of the phone OS, and even better integration of the WinRT programming model is incorporated in the phone. And on a different note, it would also make sense to bring Xbox and Windows Phone closer together.

Future of the employees

How will the different teams look like?

Traditionally, Microsoft has run the Windows Phone OEM relationships with a team dedicated to OEM specifically. This team has handled the communications and technical discussions with each specific OEM. Now, that the Nokia D&S business unit is part of the Microsoft, this team will no longer be needed, but most likely incorporated with the phone team. The Phone team is definitely going to be reorganized, but from Microsoft’s side, that should be a minor operation.

What will happen to the Nokia D&S business unit?

There is still one question remaining: how will the Nokia D&S business unit be handled?

There’s two options which would both make sense:

1. Nokia D&S will be incorporated with the Microsoft corporation.

2. The Nokia D&S will be a separate entity, with Microsoft corporation owning it 100%.

The other OEMs who work on Windows Phones will also be an interesting piece of the puzzle, and might affect the decision how this will be handled. If the Nokia D&S business unit is going to be a part of the Microsoft corporation and the phone team, it will tremendously increase competition on the WP platform for companies such as HTC, Samsung and Huawei with WP.

I believe that we’ll see much faster integration of Nokia D&S  to Microsoft than most people expect, as there’s already a good understanding on both sides of each other’ competencies and overlapping functions. Nokia key managers moved to Microsoft. This will eliminate the confusion which is usually present for many months in companies after this kind of acquisitions.

What will happen to the employees?

The people working on the feature phone will most likely see more changes than those on the smartphone projects. As mentioned earlier, feature phones are expected to change the most over the next couple of months/years which means there is going to be  a reorganization on its way.

Nonetheless, it wouldn’t be very wise of Microsoft to begin with a major layoff in the middle of the transition period. A step like that would scare the key resources away, but the overlapping functions such as marketing might be shuffled around. One thing that we must keep in mind when evaluating the situation is that Microsoft bought the Nokia D&S business unit to become successful in the phone market, not to downscale and run it down.

What did usually happen to companies acquired by Microsoft?

Traditionally Microsoft has merged the companies it acquired into their own infrastructure. Nokia has been building their systems and operations mainly on non-Microsoft systems, so people on the IT side will most likely have a very busy summer coming up, and there could be even more work available. We will most likely see Nokia transitioning fully into cloud technologies with their backend as the rest of Microsoft. There is also a possibility that the move happens only after the new datacenter has been built in Finland. But the change is inevitable.

Impact on the Finnish economy and IT industry

The impact of the Microsoft / Nokia deal should be observed from facts and not emotions, but I have to say that most of the media coverage of the subject has been everything but objective.

Let’s start from what has happened in the past, as that usually teaches us a lesson and shows us tends that might repeat itself. This is not the first time Microsoft acquired a big company. One of the last larger acquisitions in Europe would be the acquisition of Skype and Navision. Let’s observe how those companies were doing before and now under Microsoft’s management.

Acquisition of Navision and Skype

Navision A/S from Denmark was acquired by Microsoft on July, 2002. Today, it is Microsoft’s largest development center in Europe. On the other hand, Skype was bought by Microsoft in 2011. Since the acquisition, it has set the target to increase its workforce by 30%. Since both of these acquisitions proved to be positive for everyone, one would easily come to conclusion that Nokia D&S has a much brighter future than before.

The IT industry in Finland

Within the last couple of years, Nokia’s impact on the IT industry in Finland has declined steadily. Nokia did cut down on subcontractors and even the remaining subcontractors have faced a severe decline in their business. This development has forced the value chain, which got their revenue earlier from mainly Nokia, to look for new profitable opportunities. Many have exited the mobile business entirely, and some have extended their business in other platforms and to enterprise or industrial IT. All together, the IT industry in Finland is not that Nokia dependent anymore, one way or another.

If Microsoft is going to make any changes or ramp up the development, it has to invest in the workforce. The current amount of employees at the  Nokia D&S business unit has been downsized to the bare minimum, and is just sufficient to run the current setup. In the short term, there should be many opportunities rising from this change.

What will happen to Nokia?

Option 1.

People have been envisioning, that after a cool-off period, Nokia would re-enter the phone market. Let’s discuss this possible scenario. If Nokia would want to re-enter the mobile market for building phones, it  literally would have to start from scratch. Nokia would have no personnel, infrastructure or network to deliver new phones, all of that was sold to Microsoft. It would be non-rational decision for Nokia to do a re-entry into a highly competitive market without any resources. Therefore, I don’t think a re-entry into this market is going to happen.

Option 2.

What are other options for Nokia then? In the short term, Nokia would need to focus on its remaining business, so the rumors of Nokia buying another network hardware provider do make sense. For Here maps, Nokia would need to pay a licensing fees, and the auto industry seems to be the a logical expansion opportunity.

In the long term, it would not be wise for Nokia to remain on the current pillars of its business. Chances are that laws are going to change for software patents, which could leave many of Nokias patents unprofitable for licensing revenues. Chinese manufacturers are pushing aggressively to the network hardware markets, which unfortunately is not going to be a gold mine in the long run either.

How does Nokia’s future look like?

It’s good to remember that Nokia has been a chameleon over its years of existence. Nokia was always going where new emerging markets have been at each specific time. So I wouldn’t be surprised to see Nokia going to create something totally unexpected in the long run, maybe green tech. Because after all, during its years of existence, Nokia has manufactured rubber boots, tires, toilet paper and computers – they’re no strangers to radical focus changes.