Microsoft Acquires Nokia’s Phone Division To Bolster Its Windows Phone Business

September 3rd, 2013 by Trefis Team

In a move to strengthen its presence in the ever-growing smartphone market, Microsoft (NASDAQ:MSFT) has agreed to buy Nokia’s devices and services business. Under the terms of the agreement, Microsoft will pay EUR 3.79 billion to purchase substantially all of Nokia’s devices & services business and EUR 1.65 billion to license Nokia’s patents for a total transaction price of EUR 5.44 billion in cash. Additionally, Nokia will also license its mapping services to Microsoft.

Both companies have been plagued by negative market sentiment in their respective industries. Nokia, once a global leader in mobile phones, has been struggling due to intense competition from rivals Apple and Samsung while Microsoft has struggled as consumers have shunned PCs in favor of smartphones and tablets. In this article, we look at Microsoft’s strategy behind acquiring Nokia’s devices and services unit.

See our complete analysis of Microsoft here

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Acquisition To Strengthen Windows Phone

While the iOS and Android based smartphone ecosystems continue to rule the market, Windows-based phones have been gaining some traction in the smartphone market thanks to Microsoft’s partnership with Nokia. In Q2 2013, Windows’ share in the worldwide smartphone operating system market grew to 3.7%. [1] Additionally, Nokia shipped over 7 million Windows smartphones, outselling Blackberry and gaining over 10% market share in nine markets. Through this acquisition, Microsoft aims to accelerate its growth in market share and profit in mobile devices through faster innovation, increased synergies, and unified branding and marketing. Microsoft also acquired Nokia’s low-end Asha brand. This gives Microsoft a far larger footprint for Windows Phone and access to millions of users in emerging countries.

Original Equipment Manufacturers (OEM) such as HTC and Samsung scrapped their plans to launch Windows based devices citing low demand for devices that use Windows architecture. This acquisition ensures that Windows will continue to have a presence in the fast growing smartphone market. IDC forecasts smartphone shipments to grow to 1.7 billion by 2018. If Windows phone can capture 15% of the market at an average Nokia smartphone selling price of around around $160, this would translate to around $40 billion in revenues in 2018.

Windows Ecosystem Expansion

Windows 8 kernel based devices, which includes PCs, tablets and windows phones, have failed to gain traction among consumers and OEMs alike. This has negatively affected the growth and development of the Windows ecosystem. While BlackBerry has only 120,000 apps, Windows Phone store has 170,000 apps, which is only a fraction of what is available on Android and iOS currently.

This acquisition fills up an important gap in Microsoft’s device portfolio. If Microsoft can grow its sales of smartphone units, this will increase the Windows architecture user base. This will  incentivize app development and create a sustainable and profitable ecosystem for developers and users to thrive in.

Nokia Patents To Shield Windows Phones

Patents have become crucial for handset makers and mobile operating system vendors to keep competitors from infringing on their turf. We believe that Nokia’s patents will strengthen Microsoft’s case in patent battles.

Nokia has a very strong patent portfolio comprising of close to 16,000 issued patents and 4,500 pending patent applications in the U.S. Outside the U.S., the company has over 20,000 patents (both issued and pending combined) with a majority of them in Europe. Additionally, Nokia holds close to 19% of the standard essential long term evolution (LTE) wireless patents. Microsoft is paying a licensing fee close to EUR 1.65 billion for a fully paid-up license to Nokia’s utility patents. This licensing fee includes the option to convert coverage from 10 years to perpetuity.

The deal between Microsoft and Nokia is expected to close in the March quarter of 2014 when 32,000 Nokia employees will transfer to Microsoft.

We have $41 price estimate for Microsoft, which is approximately 30% above the current market price.

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Notes:
  1. Apple Cedes Market Share in Smartphone Operating System Market as Android Surges and Windows Phone Gains, August 7 2013, www.idc.com [↩]