Microsoft and Nokia: There Will Be Blood

Drainage! Drainage, Eli, you boy. Drained dry. I'm so sorry. Here, if you have a milkshake, and I have a milkshake, and I have a straw. There it is. That's a straw, you see? You watching? And my straw reaches across the room, and starts to drink your milkshake. I drink your milkshake! I drink it up.
-- Daniel Plainview in There Will Be Blood

When Microsoft (Nasdaq: MSFT  ) looks in the mirror, does it see Daniel Plainview?

You may not remember the ruthless oilman that Daniel Day-Lewis played to Oscar-winning perfection in 2007's There Will Be Blood. Plainview won't stop at anything to get what he wants, and he feasts on those weaker than him who stand in his way.

The famous "drink your milkshake" scene comes toward the end of the film, when Plainview gets his adversary, Eli Sunday, to embarrass himself by admitting to being a false prophet, and  then proceeds to club Sunday to death.

"I'm finished," Plainview belts out.

Is Eli really Nokia (NYSE: NOK  ) CEO Stephen Elop? Is "I'm Finnish" a more fitting closing shot in this case?

All I know is that Microsoft has once again tricked a weak-kneed giant into making it stronger.

Knocking Nokia
Elop doesn't see it that way. After watching the world's largest handset maker take a hit on Friday, the head-scratching CEO took to the press to clarify that his company will be paid billions in yielding to Windows Phone 7 as a smartphone platform and Bing as the default search engine.

"The value transferred to Nokia is measured in B's not M's," Elop said over the weekend. "This is something I don't think was completely explained."

It didn't matter. The stock got slammed yesterday, too. Nokia has shed 20% of its value in two trading days. It has shed roughly $9 billion in that time.

Dare I say it? The value transferred out of Nokia is measured in B's, not M's.

Now it should be pointed out that the market doesn't necessarily believe that Nokia's pain will be Microsoft's gain. Shares of the world's largest software company have also closed lower the past two trading days. Mr. Softy's market cap has been shaved by $2 billion in that time.

In short, this deal has destroyed $11 billion in value. The S&P 500 has actually managed to inch higher on Friday and Monday, so we can pin the shortfall entirely on this case of milkshake slurping.

What did Elop think would happen? A week ago, he was being applauded for his blunt assessment of his company's predicament.

"We poured gasoline on our own burning platform," he said. Now he's made matters worse by backing up a diesel tanker over the inferno.

Drainage, you boy
Elop's folly is that he misunderstood what his shareholders wanted. They never wanted Microsoft's billions, at least in exchange for a pointless surrender. Nokia is sitting on a stash of $9.4 in net cash and other liquid assets. Nokia needs the growth catalysts more than the money.

Investors would have settled for a buyout. The last thing they expected was a sellout.

It's not as if there was ever going to much of a future for its Symbian mobile operating system or even the MeeGo platfrom it was championing alongside Intel (Nasdaq: INTC  ) . However, at least there was always a chance that Nokia could catch fire on either end and reverse its trend of gradual market share erosion.

Now it's simply another Microsoft mercenary. It's a gig that doesn't pay. Just ask Yahoo! (Nasdaq: YHOO  ) .

Put a Bing on it
Yahoo! closed at $17.22 on Jul. 28, 2009. It then announced the next morning that it would be outsourcing its search through Microsoft's Bing. Yahoo! shares tanked 12% on the news. Like Elop, Yahoo! CEO Carol Bartz tried to emphasize that it would be on the receiving end of a lot of Microsoft money with little overhead on its part.

It didn't matter. Yahoo!'s shares continued to tumble.

Yahoo! is in a much better place than Nokia. It still has a thriving display advertising business. The Microsoft arrangement has assisted in Yahoo!'s marginwidening explosion on the bottom line. There's an attractive portfolio of Asian investments resting pretty with the Yahooligans. Investors don't seem to care, though. The market's been rallying over the past two years, but Yahoo! still closed last night just short of the $17.22 mark it was at before going public with its Microsoft-ian handshake.

Phoning it in
One can always argue that Nokia would have shed more than $9 billion over time by simply staying the course. It just ripped the Band-Aid off quickly, opting against an anguishing slow peel.

I don't buy it. Nokia was never going to catch up with Apple's (Nasdaq: AAPL  ) iOS on the high-end or Google's (Nasdaq: GOOG  ) Android everywhere else, but taking gobs of money to champion Microsoft's fledgling platform isn't the answer. It's really more of a question.

Why did you do it, Elop? The accusations are already starting to creep up. As a former Microsoft executive, he's been called a Trojan horse. If the stock doesn't bounce back -- and soon -- Elop's tenure at Nokia will be short. It won't be a slow peel, either.

What could Nokia had done? It obviously had to do something. The company saw sales edge up just 4% last year while market share plummeted. However, this is also a company with plenty of money in the bank. It should have been a buyer to bump up its organic malaise. It certainly didn't have to be a seller.

Instead of coming off as an opportunist, Nokia is now seen as a once talented prizefighter that just took money to throw the fight. The only difference is that it did it legally and in plain view -- with Plainview.

Do you think Nokia will bounce back? Share your thoughts in the comment box below.

Google, Intel, and Microsoft are Motley Fool Inside Value selections. Google is a Motley Fool Rule Breakers recommendation. Apple is a Motley Fool Stock Advisor pick. Yahoo! is a Motley Fool Global Gains choice. The Fool has written puts on Apple. The Fool owns shares of and has bought calls on Intel. Motley Fool Options has recommended buying calls on Intel. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz feels that Nokia should have just stuck to its guns, while also cranking out Android handsets. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 15, 2011, at 8:42 PM, JoeMamma21 wrote:

    Munarriz needs to stick with being a film critic or take a business course or two and get outside of the US and see how things are in other countries. Whenever I travel all I see is Nokia devices. They are a phone manufacturer first and foremost, and no matter how well they do year in and year out (I have been following them since the late 90"s when I took my first trip abroad) the US media yearns for their demise. First it was Motorola that was going to overtake Nokia by 2005, then Apple who sells as many phones a year as Nokia sells in an off month, now Google's Andriod...

    Please. All you "journalists" - and I use that term very loosly here - need to take the chip off your shoulder that this is actually your career, and leave the business decisions to the actual business people. Those who can't do, teach, and those who are not even competent enough to teach write for newpapers. The worst of that lot are relagated to having to peddle their dribble online, and to be honest I do not ever remember seeing Mr. Munarriz in print. Point made.

    Nokia and Microsoft are solid companies that stand the test of time, and I do not see this partnership being any different.

  • Report this Comment On February 15, 2011, at 9:38 PM, scottfool2010 wrote:

    You might be right - Stephen Elop might have a short stint as CEO, but it won't be because he made a bad decision on the platform. In a couple years, smartphones are going to be the next generation PC client, that sits in a docking station like a laptop and drives a big screen and a keyboard at work and at home. Today, the first of such a device (the Motorola Atrix) got a terrible review. Likewise, Google's Chrome got bad reviews a couple months back. Meanwhile, for a desktop OS - Windows 7 has been widely praised. Microsoft has stated they're porting Windows 8 to the ARM architecture. I'm sure there will be 2 more versions of Windows in the Windows 8 release - a Windows version for phones and tablets. Once that happens, the smartphone gets re-defined again as smartphone by itself and as a PC when it's docked and no one will be better positioned to take advantage of that event than Microsoft and their smartphone licensees. At that time, no one would trade being on the Microsoft platform for being on the Google platform and all the journalists that are criticizing him now will be calling him a genius.

  • Report this Comment On February 15, 2011, at 9:55 PM, fradking wrote:

    I am very surprised to see the re-action from the press and the market regarding this deal. For me this is an great deal; the number one cell phone company going with the number one OS company.

    Microsoft is again doing what they know best: copying the competition, which always take them many attempts before getting there though, to just crunch them later.

    They did that to IBM (remember OS/2), Apple (and they ready to do it again), Sun Microsystems, etc...

  • Report this Comment On February 15, 2011, at 10:08 PM, ericandmisti wrote:

    I bought NOK call options on Monday. I think this is a buying opportunity. Nokia had an operating system that no one wanted and had to do something. People can complain about the Windows for phones, but the reality is that it works fine (actually people say the new version is pretty good). I have an older version of Windows on my Palm Treo and it does everything you need a smart phone to do. I live in China and the Nokia phones are everywhere. I expect the combination of a top quality phone with at least a descent operating system will equate to good sales. Take out the cost of developing Symbian that was failing in the market and add in the payments from Microsoft and the bottom line Nokia numbers will improve. The stock is cheap compared to earnings and pays a good dividend. It will go up.

  • Report this Comment On February 15, 2011, at 11:09 PM, techy46 wrote:

    The four prior posters are correct and Rick's The Fool. Consumerism doesn't drive technology. The enterprise's desire to increase productivity is the mother of technical invention and the demand behind infromation technology. Who cares of a bunch of wannabe kids and their parents have to have Apple's iudiot devices, That has not a damn thing to do with Dell, IBM, Microsoft, Oracle or SAP. Nokia needs a world class mobile phone operating system so they can compete and build economical and productive smarts phones that are really clients capable of interacting with all network based application including those in enterprises. Apple's 300,000 toys apps don't mean squat to economic productivity. There isn't a single analyst on The Street, MSNBC, Motley Fool or Seeking Alpha qualified to critque the decision Elop made to join with Microsoft. Sure they can dissuade retail investor from the deal to keep the Apple bubble going for the good of the institutional investor but sooner or later Apple's bubble is going to burst.

  • Report this Comment On February 16, 2011, at 2:39 AM, Roxx wrote:

    I too think this joint venture will turn out great for both sides and the one screaming the loudest isnt Aapl, its Goog. I think they desperately wanted this tie and got beat out by Msft and now they are crying foul.You see Android is a bland system given away for free and Goog makes nothing on it. The only way it becomes profitable is for everyone to use it and do google searchs with it. The search portion is very slow right now, search is primarily done on pcs not phones and it they cant capture economies of scale, they will have spent who knows what developing Android and promoting android only to give it away to leverage their monopoly search power and all for naught.

  • Report this Comment On February 16, 2011, at 12:02 PM, techy46 wrote:

    Agree on Google. Their revenue engine is searches and the enamel is startimg to crack. First and foremost the evil behind their monetizing search position and preferences is starting to draw attention (ie. DOJ, EU, Texas AG, etc.). Google's software expertise is questiionable; they only market Android as a advertising virus. I think Microsoft and Nokia is a really good combination if they can cut thruogh the corporate red tape and just DO IT. They've got 6-12 months to put the shine on the apple (pun intended).

  • Report this Comment On February 16, 2011, at 2:04 PM, boettger1 wrote:

    "What could Nokia had done? It obviously had to do something."

    Indeed. But your criticisms are vague and you offer no alternatives.

    Prior to the iPhone, it was Nokia that was known for having products that "just work". WP7 is apparently flawed but generally decent. This partnership has got "win-win" written all over it.

  • Report this Comment On February 16, 2011, at 2:49 PM, dlchase24 wrote:

    As sensational as this article is, and as much as I like the There Will Be Blood reference, are you trying to rant about Microsoft or propose a better path Nokia should have taken?

    If you don't like the Nokia/Microsoft parternship, that's fine. I'm a Nokia shareholder and it upset me at first also. However, as much as I don't like turning to Microsoft for support, the more I consider it, the more it makes sense as a short term play. Nokia was not going to develop their own OS fast enough to compete with other manufacturers and this eliminates that hurdle.

    As for why they didn't go with Android, that's obvious. Because a Nokia Android phone will never stand out. No matter what a manufacturer does to an Android phone to attempt to differentiate, it's still considered an Android phone. Few customers look beyond that. Additionally, all the other ecosystem items Elop referred to could provide additional sources of revenue. With Android, Nokia would be just another manufacturer, with Windows Phone, there is much greater opportunity.

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