When I saw the announcement that Microsoft (NASDAQ: MSFT ) was buying Nokia's (NYSE: NOK ) devices division, I just said, "Wow." It's almost identical to the reaction I had when I heard that Steve Ballmer was going to be stepping down from the CEO role. The two big changes coming back to back aren't just a coincidence -- Microsoft is in the midst of a transformation. Whether that's a good thing or a bad thing remains to be seen, but you can no longer deny that something is in the works.
Remember when Nokia was a big-time player in the mobile phone market? In 2010, Nokia sales made up 64% of smartphone sales in China. Those were good days. Now, Nokia accounts for just 1% of the Chinese smartphone market. China may seem to be an anomaly, but the company has suffered elsewhere, too.
Total revenue fell 24% year over year last quarter, with the devices and services division revenue falling 32%. The shortfalls are indicative of the company's late entrance into the smartphone market; that market is now dominated by Apple and Samsung.
Microsoft is having a problem with its Windows phone sales, as well. In the U.S., Windows phones make up just 3.5% of the market. Internationally, it's seen stronger growth, but the domestic market just isn't working out. While there are Windows-based Samsung phones, they make up a very small percentage of the company's total phone sales. Nokia is the dedicated platform for Windows, but it holds just over 1% of the U.S. market. Meanwhile, Apple and Samsung account for over 60% of U.S. sales.
Why combine now?
The reason for the move now is twofold. One, it brings Stephen Elop back into the Microsoft fold well before Ballmer walks out. Two, this is a long game, and the earlier Microsoft starts working on the transition, the better it's going to do in the long run. Let's look at Elop first.
Elop left Microsoft three years ago to work at Nokia and attempt to turn the business around. While that move ended up netting very little for Nokia, the move to Windows Phone gave him lots of credibility at Microsoft. Even before the acquisition announcement, Elop was the odds-on favorite for the next Microsoft CEO. It now looks almost certain.
As to the long game, Microsoft has to start pushing its mobile strategy in a new direction. In its presentation that accompanied the announcement, Microsoft highlighted the challenges and potential in the mobile market. In short, there's a lot of business to be had, but pulling in Nokia isn't going to help the bottom line for years. Anyone thinking that this purchase is going to make waves in the next six months is deluded.
Overall, I think it's a good move for both companies. Microsoft has reached a point where it needs to make some big moves and has to start planning for the future in a new way. Nokia was going nowhere fast, and the tie to Microsoft should give it some help, at least in funding its innovation. The market wasn't happy with Microsoft, and the stock was down almost 6% by midday. In the long run, though, this is a good plan.
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