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Okay Microsoft, Now Comes the Hard Part

By Tim Brugger - Sep 6, 2013 at 10:17PM

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After closing the deal for Nokia's phone lineup, Microsoft has to integrate and manage a whole new business.

With the close ties between Microsoft (MSFT 1.70%) and Nokia (NOK 0.00%), 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 (GOOGL 2.39%) 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.

Fool contributor Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley 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. The Motley Fool has a disclosure policy.

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