Microsoft’s Nokia Devices Buyout: What the Deal Means for Both Sides

by Don Reisinger

It’s important to note that while the big headline surrounding Microsoft’s Nokia deal is that it’s valued at $7.4 billion, Microsoft is paying for more than Nokia’s device manufacturing business. About $2 billion of the deal covers the cost of Microsoft licensing payments for Nokia mobile patents.

Stephen Elop, who had served as Nokia’s president and CEO before stepping down to serve as executive vice president of its Devices division, is now gone from Nokia. Risto Siilasmaa is serving as interim CEO and board chairman until the company can find a permanent replacement. Under the terms of the deal, Elop will head up Microsoft’s Devices business, leaving what’s left of Nokia without a permanent leader. It should be interesting to see whom Nokia’s board picks as a permanent CEO to lead the company without its devices business.

Although the company line is that Elop will be a vice president within Microsoft, rumors abound that there’s more here than meets the eye. In fact, Elop is one of only a handful of people who are thought to be on the shortlist to become Microsoft CEO after Ballmer’s retirement. Microsoft may have paid a premium to acquire a new CEO as well as Nokia’s Devices business.

One of the big complaints about Ballmer is that he was slow to react when mobile technology started bringing rapid changes to the IT industry. With Nokia as part of the organization, Microsoft has the opportunity to reinvent itself as a truly mobile enterprise.

When Google acquired Motorola Mobility, the search company made something abundantly clear: It wouldn’t give its new subsidiary special treatment. While it’s debatable whether it’s held up to that promise, Microsoft hasn’t gone so far. Microsoft has said that it’ll happily play nice with other Windows Phone vendors, but it plans to maximize its investment in Nokia. That means Microsoft won’t hesitate to compete briskly with erstwhile mobile hardware and PC partners.

Nokia’s value over the last couple of years has been derived in large part from its patents. Even when Symbian was dying off and Windows Phones had yet to stage a sales spike, Nokia knew that its patents were desirable and worth billions. That’s perhaps why Microsoft’s decision to license them is so important. Not only does it mean Nokia might be able to survive on patent licensing, but it also means its intellectual property is still an integral component in mobile devices today. Who knew patents filed long ago would be so important now?

Back in September, when Nokia announced the deal, it said that 32,000 people are expected to transfer to Microsoft as part of the acquisition. That means that Microsoft, already a huge enterprise with nearly 100,000 employees worldwide, will be even more gigantic. But this raises the question of whether layoffs will be coming in short order after the software company decides how many employees it needs to keep the devices business running efficiently.

Windows Phone’s future rests in the success or failure of Nokia’s Lumia devices. As recent data has shown, Windows Phone is capturing more market share internationally, and much of that success is due to the rising popularity of Lumia handsets. Simply put, Microsoft needs Nokia if Windows Phone is to succeed. So you can bet the software company will lean heavily on Nokia to continue to push the envelope.

Meanwhile, Nokia’s future relies almost entirely on Windows Phone. After all, Windows Phone was the operating system that brought Nokia back from the grave. Microsoft is acquiring Nokia as a purely Windows Phone mobile device maker. It’s also the operating system that Nokia has gone all-in on. If Windows Phone fails, Nokia fails. It’s that simple.

If Stephen Elop is not appointed Microsoft’s next CEO, the executive who ultimately gets the job will have to manage a massive mobile operation that has been grafted onto a company that has been mostly all about software for 30 years. It will be a big help if the next CEO has mobile technology as part of his or her DNA. As the past several years have shown, only certain people are capable of successfully managing mobile companies today. The next Microsoft CEO will have no choice but to be a mobile chief executive.