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Okay Microsoft, Now Comes the Hard Part

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With the close ties between Microsoft (NASDAQ: MSFT  ) and Nokia (NYSE: NOK  ) , the $7.2 billion deal to acquire Nokia's phone business was likely a smooth process, especially when you consider the size of the transaction. With former Microsoft executive Stephen Elop at the helm of Nokia, and a smartphone partnership going back over two years, agreeing on $7.2 billion probably never happened so easily.

But what now? Microsoft is entering uncharted territory, and with all the noise about Nokia's loss of mobile phone market share the past year or two, it's easy to forget that Nokia still ships more phones worldwide than any company not named Samsung. 

The challenge
Through the first two quarters of 2013, Nokia shipped 123 million mobile devices, 61.1 million last quarter alone. Xbox and Surface tablet shipments, the only hardware Microsoft knows, aren't even in the same ballpark as Nokia's mobile phone sales.

Though Q2 Surface sales numbers are a bit fuzzy, a mere 1.8 million of the tablets were shipped through this year's first quarter. After taking a $900-million charge last quarter to write-off inventory of unsold Surface tablets, it's safe to say Q2 didn't fare much better.

As for the Xbox 360, Microsoft sold all of 9.9 million units its last fiscal year. Hopes are high for the new Xbox One, but not even one-foot-out-the-door CEO Steve Ballmer expects anything close to the volume of phones Nokia ships. To make Microsoft's upcoming task even more challenging, Nokia completes much of its phone manufacturing in-house, opting to farm as little work out as possible to maintain its margins.

Perhaps the biggest obstacle Microsoft will face as it's learning the mobile phone hardware business is doing so as it attempts to reverse Nokia's phone sales slide. Last year's nearly 334 million units sold left Nokia firmly in second place globally, well ahead of Apple's 130 million, but was down significantly from 422.5 million units sold in 2011; and the downward trend has continued this year.

Meeting the challenge
The hurdles Microsoft will face, however, are not insurmountable -- for a couple of reasons. The acquisition of Nokia's devices and services unit includes keeping the people responsible for manufacturing its phones.

Certainly, there will be challenges integrating Nokia folks into Microsoft's culture, but the approximately 32,000 Nokia employees that are expected to transfer to Microsoft after the deal closes -- 18,000 of which are, "directly involved in manufacturing, assembly and packaging of products worldwide" --will make the transition considerably easier.

After Microsoft's recent win in court relating to Google (NASDAQ: GOOGL  ) and its Motorola division not playing nice, and the on-going, contentious relationship the two tech giants have, learning from Google may seem counterintuitive to Microsoft fans. But there are insights that Microsoft can garner from Google, because it followed a similar path to gaining control of mobile hardware, just as Microsoft is with Nokia, to partner with their respective operating systems.

It's been two years now since Google announced it would drop $12.5 billion for Motorola Mobility. Motorola's patents definitely played a part in Google's decision, but diving into the mobile hardware space was always part of its plan. With such a dominant smartphone OS position, it's easy to see the logic behind Google's move.

But here we are two years later, and the market is just now being introduced to Google's Moto X phone, its first foray into the hardware side of the business utilizing its Motorola acquisition.

The moral of the story? Microsoft and its shareholders will need to exercise supreme patience before reaping their rewards. As Google demonstrated, it will take time for Microsoft to put its stamp on mobile hardware. Bringing the Nokia people over to Microsoft will help immensely, but integrating a whole new business isn't going to happen overnight -- regardless of who ends up taking the reins after Ballmer exits.

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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 September 07, 2013, at 6:30 AM, groberys116 wrote:

    Many Internet media organizations, such as Motley fool and Seeking Alpha pay free lance writers to write for them. Anyone can write articles and usually with no editing. Seeking Alpha's name was used for an article entitled"Will Nokia Make a Comeback In 2015". In the article the writer claimed that Microsoft could only use the Nokia brand only on feature phones until 2016. This is totally falsehoods, Microsoft has control of the Nokia brand for Smartphones for 10 years. This type of false writing should be stopped. Companies such as Seeking Alpha are acting in a highly unethical manner.

  • Report this Comment On September 07, 2013, at 11:03 AM, techy46 wrote:

    It's quite amusing, as mentioned by grobers116, to see both SA and MF continuing their Apple PC's Dead hype when it's obvious that Intel and Microsoft are now jumpng into the pool. Personal computers including smart phones and tablets are all PC's with diiferent forms and sizes. The only real difference is the addition of LTE radios to data phone devices. Microsoft's Nokia D&S acquisition was a steal. At $4 PS MS couldn't have asked for a better deal. You guys really need to review the history of Apple, Ashton-Tate, CPM, Lotus, Novell, Sybase and WordPerfect to see what happens when Wintel wakes up to a missed opportunity.

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