In a smart move that integrates its Windows 8 mobile software division with a full-fledged hardware design team, Microsoft (MSFT +0.63%) has decided to acquire the handset arm of phone maker Nokia (NOK 0.25%) -- along with a 10-year lease license on its patents -- in a deal worth a whopping $7.2 billion.
Let's look at how this move adds value to Microsoft's future prospects, and what investors can expect moving forward.
A time-tested strategy
Microsoft's newly acquired control over the Windows 8 mobile ecosystem means that the company can now respond faster to ever-changing customer demands by tweaking the design or software features of its phones. It's a strategy that has worked for Apple (AAPL 0.87%), a company that's perhaps the best example of how to integrate mind-blowing hardware with super-smooth software. Even Google realized the wisdom of such a strategy, as is evident in its $12.5 billion acquisition of Motorola Mobility.
A valuable buyout
Nokia is a company that still has a rock-solid brand image and was the leader in terms of handset shipments as recently as 2012, when it fell behind Korean giant Samsung. Even at the end of June this year, Nokia still had a sizable 14% global market share in terms of handset shipments.
Newer horizons
Thanks to the deal, Microsoft can now tap into newer smartphone markets that include countries Latin American countries Mexico, Chile, Brazil, Argentina, Peru, and Colombia.
Latin America is important to Microsoft, and for a particular reason. Recent data from research firm IDC reveals that the Windows 8 phone OS is now in second place after Google's Android OS with 12% growth in market share in Mexico, Peru, and Colombia. It holds third position in Argentina, Brazil, and Chile. At the same time, the acquisition enables Microsoft to directly sell its handsets in established markets for Nokia such as China and India.
But everything may not be hunky-dory. Here's the gaps in the bullish theory.
Questions, anyone?
Microsoft's plan to raise its overall smartphone OS market share to around 15% by 2018 -- from a current 3.7% -- seems a tad optimistic. The latest IDC data reveals that Google's Android OS possesses a whopping 79.3% share worldwide, with Apple's iOS coming in a distant second at 13.2%.
Neither of these companies want to part with market share. While Google's launch of the Moto X handset signals more exciting times ahead, Apple has now gone ahead and launched not one, but two new iPhone models. Nokia, on the other hand, has no impending product launches.
Microsoft also needs to consider Nokia's drastic fall in market share in India and China, two of the fastest-growing markets for smartphones. In India, Nokia had been relegated to fourth place, with around 5% of the market at the end of June this year, says IDC . The data reveals Samsung as the clear market leader at 26%, followed by Micromax Mobile at 22% and Karbonn Mobiles at 13%.
In China, Nokia's market share is not even 1%, as it's been pushed out by local brands such as Coolpad and Xiaomi. The importance of China, the world's biggest smartphone market, is evident, as Apple seems to be going all out to grab a bigger share of the market by preparing to strike a deal with the largest local carrier, China Mobile, if recent reports are to be believed.
Foolish final thoughts
Microsoft needed a company like Nokia so it could change strategy in a post-PC world. The deal should consolidate its position in the smartphone race and help it to become a strong hardware manufacturer. However, it's unlikely to yield the desired results within the targeted time frame.
Microsoft also needs to concentrate more on the Windows OS itself, as the latter's relative scarcity of apps compared to those for Android and iOS will prove crucial in gaining more market share. At the moment, it probably doesn't pay to be bullish on Microsoft, but investors would do well to keep a close eye on future developments at the company.
