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Why Microsoft Shouldn't Buy Nokia

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Is a Microsoft  (NASDAQ: MSFT  ) led takeover of Nokia  (NYSE: NOK  ) in the cards? Probably not--with the brightening future of Windows Phones, there's no longer a pressing need for Microsoft to buy the Finnish handset manufacturer. 

No longer a pressing issue

There was a time months ago when such a deal made sense. Windows was a fledgling mobile operating system, mired in stagnation, and Nokia was the only partner truly dedicated to the platform. Microsoft needed to ensure that Nokia remained committed to Windows. Buying the company was the best way to ensure that. 

But times have changed. According to Kantar Worldpanel, Windows is the fastest growing smartphone operating system. Over the last three quarters ended in April, Windows garnered 5.6% of U.S. smartphone sales, up from 3.8% in the previous year.

Windows is also popular among an important demographic--first time smartphone buyers. According to Kantar, of those that bought a Windows phone last year, 52% had switched from a feature phone. With over half of the U.S. market still feature phone owners and many of those expected to upgrade within the next year, Windows is the best positioned to capture that growth. 

And while Nokia is the most important player in the Windows ecosystem today, expect Chinese manufacturers to drive the platform's growth over the long term. Microsoft already has relationships in place with Huawei and ZTE in mobile along with Lenovo as a major partner in the PC space. These allies will give Microsoft the scale needed to challenge Samsung's and Apple's dominance. 

But, but, but!

Of course there's an obvious counter arguments to my points above. With Nokia accounting for four out of five Windows Phones sold, Microsoft's mobile success is still heavily tied to the company. Without Nokia, Microsoft's "bright prospects" would turn into a devastating downturn.

But while Microsoft needs Nokia, Nokia also needs Microsoft. Yes, Nokia could switch to Android, but doing so would create a scramble to build new software and services around these devices. Good luck trying to sell a bare bones Android handset for a premium price in today's market. Nokia could delay launching new products until the software is ready, but this would do nothing for Nokia's sales figures in the short term. And for all of this upheaval, would it really result in selling any more handsets?

Should an Android partnership develop, Microsoft might figure it’s better off buying Nokia rather than seeing it split allegiances. But remember that CEO Stephen Elop has already discussed Android licensing once before and in the end decided that the cost of partnering with Google was too high. Nothing has changed from those original negotiations. 

Proponents of the takeover also fear another player could swoop in. In June, the Financial Times reported that China's Huawei may be interested in using acquisitions to expand its mobile presence. Of course, Nokia would be the first candidate on Huawei's list but good luck getting such a deal past European regulators. Other players may decide to buy the Nokia's crumbling handset business. Today, however, there're no apparent suitors courting the company. 

And if Microsoft were to acquire Nokia, it would be taking on a major headache. Microsoft would have to find a way to integrate the two businesses while simultaneously shedding thousands of employees. In addition, it would risk annoying other Windows manufacturers that might be unhappy about Microsoft making its own handsets.

Foolish bottom line

While the acquisition would secure Microsoft's strategic interests, those needs aren't as pressing today as they were a year ago. So unless the price tag comes down, why buy Nokia's cow when you can get the milk for free?

Read/Post Comments (11) | Recommend This Article (0)

Comments from our Foolish Readers

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  • Report this Comment On August 26, 2013, at 5:05 PM, jbSFO wrote:

    Please, not this stale rumormongering again! It makes just as little sense as "Why NOK should/shouldn't Buy MSFT ..." Nothing happened when this whole nonsense started two years ago and nothing of the sort will happen now.

    Things exciting and major are happening at NOK and MSFT, both. Please, let's put our heads to thinking thru those and write some fresh insights!!

  • Report this Comment On August 26, 2013, at 5:33 PM, ramaus wrote:

    Old crap.

  • Report this Comment On August 26, 2013, at 5:56 PM, ctyank99 wrote:

    One thing for sure is that Microsoft needs to do more advertising for the WP8 and Nokia Lumia line!!!

  • Report this Comment On August 26, 2013, at 6:00 PM, marv08 wrote:

    No idea what European regulators would, in general, have against Huawei buying Nokia (not that I would consider it likely). Neither is anywhere close to having a monopoly in anything, so there is no regulatory issue here.

    Market share is important for MS, as they get money for every license. But for Nokia, it is all about profitability. They have not achieved profitability yet, and without their NSN business (which is, by design, periodical and no safe bank) and MS's quarterly $250m cheque and enormous marketing support, they would burn through cash.

    The thing to watch is Nokia's next earnings report and the effect the obviously great 520/521 sales have on the bottom line. If (not saying this is the case, I will wait for the earnings) the quarterly deficit grows, MS could end up in a situation where they have to make a decision. Without Nokia, WP is dead in the water. And even if the earnings are OK, this is no guarantee that Samsung, ZTE, Huawei, Yulong, Micromax et al will not react to the 520/521 'somehow'; especially Samsung can easily afford to enter a pricing war.

  • Report this Comment On August 26, 2013, at 6:01 PM, marv08 wrote:

    @cytank99: Where do they need more advertising? Here in Germany I see more WP and Nokia ads than Apple and Samsung ads combined.

  • Report this Comment On August 26, 2013, at 11:50 PM, techy46 wrote:

    It depends on whether MS is happy with making 60% on a $30-80 software license or would rather make 20-30% of a $100-600 device. The former allows you to pay a lot less attention to all the complaining and whining consumers.

  • Report this Comment On August 27, 2013, at 12:21 AM, marv08 wrote:

    @techy46: Windows Phone licenses are estimated to cost between $23 and $30, see e.g. , not $30 - $80. Even an OEM license for Windows 7 or 8 (desktop) does not cost $80. The RT license (including MS Office) is rumored to cost around $90 though (but unconfirmed).

  • Report this Comment On August 27, 2013, at 7:26 AM, flybywire54 wrote:

    No reason for Microsoft to buy Nokia , unless someone else wants to buy Nokia . Google was offering lots of money to Nokia but they chose Microsoft . While on the short term the choice might seem the wrong one , on the long term I think it was the right thing to do , provided Microsoft becomes much more energetic at releasing upgrades and apps (with developers) .

    As for Samsung and lesser Asian manufacturers going WP8 , they don't produce quality products and are weak in software . As long on Nokia I am not so worried

  • Report this Comment On August 27, 2013, at 9:12 AM, PeterC89 wrote:

    Remove Nokia from the equation, where would WP8 be?

  • Report this Comment On September 03, 2013, at 12:17 AM, talk2ryan wrote:

    Well Msft just bought Nokia. The D&S business. And they seem to have paid just 7.1MUSD. Good deal for MSFT.

  • Report this Comment On September 03, 2013, at 10:06 AM, golfmatchplayer wrote:

    Good pricing, MSFT exerts more control over their own destiny for mobile and Windows 8. This should absolutely strengthen their position with consumers and businesses and help the adoption rate for Windows 8.

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