Microsoft's Buyout of Nokia's Mobile Phone Business Is No Panacea

NEWS ANALYSIS: Microsoft can’t expect that its $7.1 billion purchase of Nokia’s phone business will allow it to quickly grab market share from Android or iOS.

In 2011, newly minted Nokia CEO Stephen Elop sent a 1,300 word internal company memo comparing the company's phone business to the plight of a North Sea oil worker facing the frightening choice of remaining on a fire-engulfed oil platform or taking a chance and jumping into the frigid waters.

In the memo, which in this age of passive, corporate-speak (leaving to pursue outside interests, etc., etc.) actually conveyed an important message: The oil worker jumps and is saved. The Nokia memo warned, “We fell behind, we missed big trends, and we lost time.”

Now Elop is jumping back to Microsoft along with Nokia's handset business in a $7.2 billion deal aimed at making Microsoft's smartphone business budge from the single-digit, back-of-the-pack market share.

Microsoft's business is not in dire trouble. The company wallows in revenues, profits and is funding the purchase through the $60 billion the company holds overseas out of the United States taxman's reach.

But Microsoft's smartphone business is sickly. The company, despite all its efforts, held a 3.3 percent worldwide share at the end of the 2013 second quarter, up from 2.6 percent for the year earlier quarter, according to Gartner.

By contrast, Android holds 79 percent and Apple's iOS holds 14.2 percent. Maybe third place would not be so bad if not for the fast-growing presence of low-end feature phones from China, Taiwan and India. Samsung and Apple have much more to fear from the “smart enough” rising low-end segment than from the Microsoft and Nokia combination.

The sale of Nokia's handset business to Microsoft continues the “services and devices” push outlined by Steve Ballmer and apparently remains firmly in place despite Ballmer's announced intention to retire in a year. The return of Elop kindled speculation that one Steven (Ballmer) would be replaced by another Stephen (Elop).

In the annals of peripatetic executives, Elop may be a record holder having made stops at Lotus Development, Boston Chicken (as CIO), Macromedia, Adobe, Juniper and Microsoft (round one) as the head of the business division before going to Nokia. If Microsoft is looking for someone who knows the innards of big, sprawling tech companies, Elop is a good choice. If they are looking for someone to lead the company to a new era of social, mobile, cloud-driven services, Elop would not be a first choice.

The Microsoft and Nokia deal is a sideshow in the greater game currently being played out in the telecom space. At the same time the $7.1 billion Nokia deal was announced, a much bigger deal was taking place in England rather than Finland, where Nokia is based.

British-based Vodaphone is due to receive $130 billion for its stake in Verizon Wireless being sold to Verizon Communications. Meanwhile, Softbank's $21.6 billion for 78 percent of Sprint is moving forward. It is unlikely that AT&T will sit on the sidelines as the wireless carrier business is rearranged. While Microsoft was investing in the devices side of the mobile equation, the big money at play is taking place in the services and carrier side of the business.

Scooping up Nokia puts Microsoft firmly in the handset hardware business instead of its traditional licensing operating software to hardware manufacturers model. Microsoft set the stage for this change when it entered the tablet business under its own name, in a move that rankled former partners and has yet to be proved a success. The company took a $900 million write off in its most recent quarterly report due to poor sales of its Surface RT tablet.

If the company wants to exert tight hardware and software control over its smartphone business, then the acquisition of Nokia for what can only be described in the mobile market as small change is clearly worth the price. If the company expects the Nokia purchase will enable a serious challenge to the Android and Apple business anytime soon, that is not about to happen.

Eric Lundquist is a technology analyst at Ziff Brothers Investments, a private investment firm. Lundquist, who was editor-in-chief at eWEEK (previously PC WEEK) from 1996-2008 authored this article for eWEEK to share his thoughts on technology, products and services. No investment advice is offered in this article. All duties are disclaimed. Lundquist works separately for a private investment firm which may at any time invest in companies whose products are discussed in this article and no disclosure of securities transactions will be made.