The Nokia Era Comes to an End, and What This Means for Your Money

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The meteoric rise of Nokia  (NYSE: NOK  ) in the years leading up to catastrophic bursting of the tech bubble was breathtaking. The company's shares went from trading in the $2-$3 range to scraping $60. Nokia practically overnight became a corporate superpower, sporting a market cap of $250 billion at its peak in 2000. Nokia was thriving in 2000, when according to the research group Gartner Dataquest, Nokia held a leading 30.6% market share of the mobile phone market, which was 17.3 percentage points more than the second-place Motorola held .

Even as Nokia dealt with the severe backlash of the bursting of the infamous tech bubble in 2000 and 2001, its core business remained strong. As late as 2007 the company held a dominant position in mobile device industry, with a 40% share in the handset market.

The bigger they are the harder they fall
In 2007, Nokia still held onto a valuation over $150 billion. Then the empire began to collapse. The dramatic rise of Nokia was almost as shocking as its fall . Along with the rest of the market, Nokia's stock fell in 2008, however unlike the broader market, never recovered. Over the following years the company's market share withered away, while its stock price plummeted. Now in 2013 Nokia shares trade at roughly $5, and carry a valuation of a meagerly $19 billion.

The fat lady starts to sing
On Sep. 3, Nokia agreed to sell its main handset business to Microsoft  (NASDAQ: MSFT  )  for $7.2 billion. The seeds of this deal were planted two years ago, when Nokia made the controversial decision to use Microsoft's Windows Phone software for smartphones, opposed to Nokia's own software or Google's  (NASDAQ: GOOGL  )  Android operating system.

This deal, which includes an agreement to license Nokia's patent portfolio for 10 years, will bring 32,000 of Nokia's 90,000 employees to Microsoft, and leaves Nokia with its networking equipment unit, navigation business, and technology patents.

Microsoft pushes into mobile
Why did Microsoft acquire this troubled business? Many see this as a continued attempt by the company to push further into the fast-growing mobile industry. While Microsoft's own Surface tablet has sold sluggishly since its launch last year, Nokia's Lumia series have helped in boosting Windows Phone's market share in the global smartphone industry to 3.3%, surpassing BlackBerry  (NASDAQ: BBRY  )  for the first time this year.

Under the past deal between Nokia and Microsoft, Microsoft got less than $10 per phone in software royalties. Now, since Microsoft owns the software side of the product as well as the hardware side, Microsoft stands to make roughly $40 per phone sold.

The strategy of controlling both the hardware and software sides of the product has successfully been employed in the past by Apple  (NASDAQ: AAPL  ) . Combined with Google's Android platform, Apple's iOS system control 90% of the global smartphone market, posing stiff competition for Microsoft's Windows platform.

What this means for your money
For Nokia investors, this marks the end of a long-standing era. Going forward, Nokia will no longer be a global superpower in the mobile industry. While its hardware segment may be revived by Microsoft, investors in Nokia will not benefit, and are left with a relatively small and insignificant networking and navigation company. Juha Varis, Danske Capital's senior portfolio manager, put it simply, "So this is the outcome: The whole business for 5 billion euros."

For Microsoft investors, this deal quadruples the company's exposure to the Window's Phone segment, making Microsoft's intent to develop as a mobile-centric company even clearer. As a result of this deal, Nokia's CEO, Stephen Elop, is rumored to be a top candidate as a replacement for the outgoing Steve Ballmer.

Will Microsoft gain a strong hold on the global smartphone industry? Your guess is as good as mine, but one thing I am fairly sure of is that the continued efforts of Microsoft to sprout into the mobile industry will eventually yield results.

How about the effect on Apple, Google, and BlackBerry? Since Window's Phone platform is likely to remain a very distant third to Apple's iOS and Google's Android, these two companies are unlikely to be majorly affected. For BlackBerry, the story is the much of the same. Nothing about this deal is likely to drastically affect current conditions for BlackBerry. In the end, the Nokia Lumia product will still be the same, and consumers are not likely to feel any differently about it than they did a month ago.

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Read/Post Comments (5) | Recommend This Article (1)

Comments from our Foolish Readers

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  • Report this Comment On September 09, 2013, at 1:59 PM, Waseem80 wrote:

    "investors in Nokia ....are left with a relatively small and insignificant networking and navigation company"

    Are you sure how small it is? It makes about 50% of Nokia's 2012 revenues. Ever heard of LTE? Nokia is nr. 2 in that fastest growing telecom infrastructure market. It is a very competetive market, but so is smartphone business.

    Do you know how profitable rest of Nokia is? its your homework. Do it before writing a word again.

    It may or may not be an attractive investment. But your facts are way off the mark.

    Long Nokia, very long indeed;)

  • Report this Comment On September 09, 2013, at 2:46 PM, tundrowalker wrote:

    Funny ... author's take on this situation doesn't mimic the market. When the acquisition went through, Nokia shares went up, MS shares went down. Granted, this is just short-term shuffling, and about 20% of a stock price is just day-trader whim or folks acting on a "hot tip". Long-term, it does cut the middle-man out of MS' phone game, so they can profit. But, 10 years to use some patents isn't very long. Nokia gets to part ways with a dying phone business, so they can focus more on making patents and increasing the product they're doing better. I wouldn't say Nokia is going to sky-rocket any time soon. If I'm smart (whcih I never said I was), I'd wait for my Nokia to hit 50% return and dump it. B/c there is nothing showing that it will sky-rocket in the next few years. IE: if their other parts of industry were so leading edge, then those would have grossly out-shined the phone aspect, and the stock wouldn't have been tanked for so long. I think I'll take my 50% and be happy. Might kick myself later, but 50% is nothing to sneeze at.

  • Report this Comment On September 09, 2013, at 4:35 PM, hawkhell wrote:

    Nokia died and is making a comeback. Who writes these things? Nokia pushed windows phone 8 into a hard market to enter and has done nothing but gain ground. You don't have to control the entire to be successful.

  • Report this Comment On September 09, 2013, at 4:50 PM, Zipacna wrote:

    I'd be very reluctant to write off Nokia.

    While its involvement in cellphone hardware may be done, it's still got a lot of assets in telecom infrastructure.

    Anyway, Nokia has reinvented itself a few times. There's a chance that they realized that the chances of them recovering the cellphone market share they once commanded were nonexistent - given the stiff competition from Asian companies.

    Actually, while Apple will probably stick around for a while (especially in the US), I'm willing to bet that they're going to wind up being a niche player in the cellphone market pretty soon (a couple of years). Their product is simply not innovative or competitive enough.

    There are only so many iSheep out there.

  • Report this Comment On September 09, 2013, at 5:04 PM, Waseem80 wrote:

    Tundrowalker has a valid point. Although that's the rear-view mirror. NSN has been cashflow positive for a few quarters---but restructuring costs have been eating away profits. Besides, next quarter would be the first one where Nokia will report NSN as a fully owned subsidy. They have been making steady progress in LTE, but chinese competetition is fierce there too.

    Here has also been cashflow positiv, although no GAAP earnings there too, because of writing down costs. Here has been investing a lot back onto business.

    It's a more stable business now, kind of fairly valued. And true, it won't skyrocket anytime soon.

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