Microsoft To Pay £3.2bn For Nokia Phones

Microsoft Buys Nokia Handsets

Updated: 12:02pm UK, Tuesday 03 September 2013

By Niall Paterson, Media and Technology Correspondent

In the oft-confusing world of tech mergers and acquisitions where the ultimate intent is often opaque, shrouded in mystery, only to be revealed at a later date with some snazzy product launch, Microsoft's purchase of Nokia's handset business can easily be understood, and summed up in seven words.

An attempt to stuff Apple and Google.

Trying to gauge the likely success or otherwise of the strategy will take a little longer, I'm afraid.

Certainly, both are companies whose star has been waning of late.

Nokia remains the world's second largest manufacturer of mobile devices behind Samsung - but not in the top five when it comes to smartphones.

As a brand name, Microsoft remains iconic. Yet it, too, has struggled to make inroads into mobile; too slow, say some, to respond to market demand.

Sales of its Surface tablets can most charitably be described as sluggish (if a $900m charge to last quarter's accounts, thanks to the underperforming Surface, can ever be charitably described).

Prior to the deal the two companies had been working together to try to make inroads into the smartphone market.

A partnership formed in 2011 placed the Windows Phone (WP) operating system in Nokia's Lumia devices, and sales of Lumia have seen WP's global market share rise to 3.3% - beating BlackBerry.

Still, Google's Android and Apple's iOS remain dominant, in 90% of smartphones.

So in buying Nokia's mobiles and patents Microsoft is making clear it thinks it can do better with overall control of the devices on which its OS (largely) runs, and continuing with CEO Steve Ballmer's plan to restructure the software company into a devices and services organisation.

A little like Apple, you might say.

Microsoft and Nokia's problems are legion and well-documented, but worth briefly reflecting on.

Despite dominating the software market for nigh on 30 years, the company has struggled to adapt as demand for PCs has waned.

Increasingly our online experience is through tablet and smartphone - benefitting Apple, with its iconic iPhone and iPad, and Google, with its market-dominant Android OS.

Nokia has seen sales fall 24% in the three months to June, compared to last year. Just 53.7 million phones were sold, down 27%.

Some have argued that the price agreed by Nokia, roughly a quarter of sales last year, amounts to "fire sale" prices of a 150-year-old company that once dominated the mobile market.

For my part, when a business is so clearly in freefall, with no guarantee of a return to rising sales and profitability, such a sum looks pretty close to fair.

Others say that Microsoft itself is pursuing a pretty risky strategy - the second most expensive acquisition in the company's history essentially commits them to the highly competitive mobile devices market, where margins are more often than not pretty low.

Again, one would ask: what's the alternative?

Microsoft cannot ignore mobile, and with precious little hope that other manufacturers will at this late stage choose to adopt Windows Phone, why not purchase the company it was already investing huge sums in to keep afloat?

Nokia's 150-year history is not entirely at an end. Microsoft can use the Nokia brand for at least 10 years, and what remains of the Finnish company - its networks business, mapping and what's left of its patents portfolio - now has a sizeable pot of cash to invest.

Nokia may well return to form.

The same is true of Microsoft. But consider those they will have to "stuff" in order to get there.

Apple and Google are no strangers to, er, competitive marketing strategies. They hold huge brand recognition - and, more importantly, brand loyalty.

To gain more than a foothold in this market Microsoft's new devices arm will need to innovate.

The deal will conclude early next year. They'd best have something to announce between now and then.

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