The real reasons Microsoft paid Nokia over $7bn
Earlier today it was announced that Microsoft had bought the devices division of Nokia for an effective price of just under $5bn and had licenced Nokia’s patent portfolio for just under $2.2bn. There are 3 aspects of the deal I think are important to understand why Microsoft would buy part of Nokia and only 1 of them is about making Windows Phones.
Reason number 1 and most obvious is making Windows Phones. Microsoft has been having a hard time in significantly increasing the market share of the Windows Phone platform worldwide. The goliaths of Apple’s iPhones and Google’s Android army have dominated the mobile landscape the world over and the team from Redmond have only been able to secure between 3.3% and 3.7% depending on who you ask. The only place where Windows Phone has really take off is Latin America where it is the no. 2 operating system according to the IDC.
Having a hardware division that can properly execute on the software that you are designing can lead to a better platform, just look at Apple’s iOS. Microsoft has the opportunity now to create a truly great mobile OS along with great mobile devices that focus on the best attributes of the software. Microsoft must iterate faster to become a true force in the smartphone battle.
Reason number 2 a new CEO for Microsoft. With the recent announcement of Steve Ballmer’s imminent retirement the spotlight has been thrown on Microsoft to see who will be the next leader of one of the largest companies in the world. For the first time since the company was founded there is no clear succession plan for Microsoft. Stephen Elop, the now former CEO of Nokia, is a former Microsoft man having worked in the company for just under 3 years before taking the helm at Nokia in 2010. He is the perfect candidate for the position from a Microsoft point of view having not only been the head of the Business Division that oversees Office but also now having been involved in one of Microsoft’s key growth areas for the future in his time at Nokia that being mobile devices.
The timing of the move could not have been better for Microsoft. Steve Ballmer all but confirmed today the Elop was on the list when he said: “Our board is going through a process open to internal and external candidates. It’s a process that they wanted well-known so they could consider everybody, internally and externally. Stephen Elop happens to be going from external to internal, but our board will consider everybody. They will do it in private — that’s the right way for the board to conduct its business.”
While this purchase does finally give Microsoft the chance to control both the hardware and software evolution of the Windows Phone ecosystem in much the same way Apple does, I think the purchase has less to do with making smartphones and more to do with making money from smartphones.
Microsoft earns more money from patent licencing agreements that it has with Android OEMs than it does from Windows Phone. According to many sources in the industry including Trefis, Citi and Goldman Sachs, Microsoft is earning anywhere from $3 – $5 per device sold by any one of the of the Android device manufacturers that Microsoft says have licencing agreements with it. According to Corporate Vice President and Deputy General Counsel of Microsoft Horacio Gutierrez, “80 percent of Android smartphones sold in the U.S. and a majority of those sold worldwide are covered under agreements with Microsoft” with the likes of Samsung, HTC, ZTE, Foxconn, Acer and LG all having capitulated. Foss Patents notes 20 different licencing agreements that have been made publicly available.
The Next Web spent some time analysing the potential amount of money that Microsoft makes annually from Android licence payments and brought it in at about $400 million a quarter give or take. With Android OEMs selling more and more devices Microsoft’s profit from patents can only grow.
Which brings me to the last reason for Microsoft’s deal with Nokia, patents. Nokia has been around since the beginning of smartphones and has the patent portfolio to prove it. While Microsoft hunts for more revenues to sustain it while it battles to get Windows Phone to a greater market share patent revenue from Android OEMs will continue to keep the coffers full.