Microsoft Should Buy Nokia

(Jun 22 2011) Smartphones

1.  

   By Carl Howe, Research Director, and Eugene Signorini, VP of Research, Yankee Group

   When we first heard rumors that Microsoft might spend $19 billion to buy Nokia, the largest maker of mobile phones, our initial reaction was "Why bother?" After last year’s strategic partnership to supply Nokia with Windows Mobile software, the upside to an actual purchase seems limited. After all: 

   • Microsoft already leads Nokia in smartphone interest among consumers. Yankee Group’s 2011 US Consumer Survey, Wave 1-3, shows that 9 percent of U.S. consumers plan to buy a Windows-powered mobile phone, while only 1 percent plan to buy a Nokia one.
   • Nokia has already committed to the Windows Phone OS and Bing. Nokia signed a definitive agreement to use Windows Phone software to power its smartphones back in February 2011. Not only did this assure Microsoft a place in Nokia’s smartphone hardware, but it made Microsoft’s Bing search engine a key part of Nokia’s services.
   • Hardware isn’t financially attractive to Microsoft. Any hardware business running on single-digit profit margins would drag down the 78 percent gross margins Microsoft makes from its software licensing business. 

   Despite being a PC powerhouse brand, Microsoft’s stock has gone nowhere in a decade because it has no credible way to capitalize on the mobility boom sweeping the world. Yankee Group predicts global mobile service revenue will exceed $707 billion in 2011, but Microsoft is currently ill-positioned to capitalize on the opportunity. The reality is that in the new world where mobility and cloud-delivered content rule, Microsoft’s old model of deriving significant revenue from software licensing is becoming irrelevant.

   Microsoft needs a major strategic shift that will see it derive revenue from cloud-based services, advertising and hardware sales. It is already venturing down this path: Bing is a major attempt at capturing some of the advertising revenue Google has so successfully harvested, while its Xbox 360 gaming initiatives already combine hardware with services revenue from cloud-based content offerings. But to complete this strategic shift, Microsoft needs to do two things better: control and scale its ecosystem through a vertically integrated business model.

   Nokia Is Microsoft’s Best Chance 
   Yankee Group believes the key to reinvigorating Microsoft’s mobile prospects is for it to focus on delivering a great "connected experience." Yankee Group defines a great connected experience as one that combines network connectivity, connected devices and cloud-based content into a seamless engagement that captivates users (see the March 2011 Yankee Group Report, "The Next Tipping Point: The Connected Experience"). 

   Microsoft today can’t deliver a complete connected experience because it doesn’t have all the ingredients; it only sells software and content. Meanwhile, Microsoft and Nokia’s biggest competitors--Apple, Samsung, RIM, LG and HTC--are already working on their own vertically integrated connected experiences. By buying Nokia, the largest mobile phone maker on the planet, Microsoft could in one acquisition gain:

   • Deep relationships with most network owners. Nokia partners with nearly every mobile operator on the planet in bringing new phones to market. 
   • World-class device manufacturing. Nokia manufactures roughly half a billion phones a year worldwide, and those phones are some of the most rugged and well-built mobile devices on the market today. 
   • Cloud-based content. Nokia brings a wealth of network services ranging from Ovi Maps to Nokia Music Services to Microsoft. 

   While this merging of software and hardware would undoubtedly be a shock to both companies’ cultures, it is one of the few ways both can demonstrate to Wall Street that they have futures. Microsoft spending $19 billion--an amount only twice what it just spent on Skype and significantly less than it has in the bank--to gain Nokia would reassure Wall Street investors because they would see Microsoft become the dominant mobile provider, monetize its Windows Phone investments, capitalize on world-class hardware scale and stake a claim to the post-PC era. 

   Wall Street’s big knock on Microsoft is that its fate is inevitably tied to that of the PC software industry. As the world moves to a post-PC era, Microsoft will have a new mobile market in Nokia that can provide new avenues for growth.

    

   Bookmark or Share this article

Login to comment