Windows Phone 8 is gaining market share in Europe thanks in large part to devices like Nokia’s Lumina 920.

SEPT. 3, 2013 • With its 2011 partnership deal coming up for recommitment next year, Microsoft Corp. is paying €5.44 billion ($7.2 billion) to purchase Nokia Corp.’s phone business outright. The transaction amount is about one-quarter of Nokia’s 2012 sales. Of the total, €3.79 billion is devoted to purchasing Nokia’s devices business and 8,500 key patents, with €1.65 billion allocated to securing broad IP licenses. The deal is expected to close by the first quarter of 2014. Nokia has become one of the primary producers of Windows 8 phones as it abandoned its own Symbian operating system in search of greater smartphone market share. Although Nokia is the No. 2 producer of mobile phones behind Samsung, in the critical smartphone segment the Finnish manufacturer has yet to break into the top five ranking. In the deal Microsoft acquires Nokia’s hardware business, including important technology licenses with companies like Qualcomm but not Nokia’s navigation, network or patents assets. In the case of Nokia’s Here mapping apps, Microsoft gains equivalent of ownership on Windows Phone while Nokia is free to refine the software for other platforms. For ongoing mapping data services from Nokia the two firms have made a four-year agreement in which Microsoft pays undisclosed annual payments. Microsoft also gains the rights to combine Nokia mapping data with data from other sources, and the ability to syndicate Nokia’s data to clients via its Azure cloud service.

Impact: The Nokia acquisition comes at a very interesting time. Microsoft just announced a major reorganization and the departure of longtime CEO Steve Ballmer. The company had seen major disappointments in its hardware business, especially on the mobile side. There were some analysts arguing that Microsoft should completely get out of the hardware business. Instead, by acquiring Nokia, they signaled they are still very committed to competing against Apple, Google and others in the high-end mobile space. Unfortunately for Microsoft their investment in mobile hardware has not paid off and they remain far behind in the space.  It seems dubious to think that buying Nokia can help matters.

Nevertheless, if Microsoft wants to remain competitive in mobile hardware acquiring Nokia makes much the same sense for them as Sony Corp.’s October 2011 buyout of Telefonaktiebolaget LM Ericsson. Both conglomerates are set on a strategic model where tight integration between their families of devices and services is becoming more and more imperative. Although Microsoft was seen as the senior partner, it could not effectively control the entirety of Nokia’s device strategy enough to guarantee slavish accommodation to Microsoft’s hardware and services integration plans. The company just launched a significant divisional reorganization to focus on such broad hardware and software integration, and buying a major smartphone maker will make competing in that vital arena more plausible. Considering the scale in which Microsoft is accustomed to operating in, purchasing Nokia’s hardware business was the only way to go. According to IDC, Nokia accounted for 81% of Windows Phone device shipments during the second quarter of 2013. Compared to the same quarter last year, Windows Phone shipments have grown from 4.9 million to 8.7 million globally – thanks in large part to Nokia’s efforts. That’s still small change to the 187 million Android devices, and 31 million iPhones, shipped globally during 2Q 2013. Windows Phone is showing some market share growth, however, albeit mostly in Europe – Nokia’s primary market. According to Kantar Worldpanel ComTech, in the major European markets of France, Germany, Italy, Spain and the United Kingdom, Windows Phone share grew from 4.9% to 8.2% for the three months ending in July. The United States remains a much harder smartphone market to crack, with Windows Phone growth during the same period at only 3% to 3.5%. So yes, Microsoft secures likely the best Windows Phone maker to further its mobile device plans, yet the competitive road ahead is a long haul requiring a great deal of investment to succeed. Microsoft might be able to compete better in the short term with the likes of Samsung and Apple, but there is no saying when it can tell investors that market share parity could be achieved, if ever.

Nokia is investing heavily in competing with Google Maps with its own service called here.

There is another asset that Microsoft is acquiring in the deal: Nokia chief executive Stephen Elop. Nokia hired him away from Microsoft in 2010, and Elop was instrumental in consummating the partnership with Microsoft a year later. Upon finalization of the acquisition of Nokia assets, Elop will head a much beefier Devices and Studios Engineering Group at Microsoft. With CEO Steve Ballmer’s retiring within the next 12 months Elop jumps to the top of the short list of possible replacements. To be fair, Elop was already seen as a candidate prior to the acquisition, but now he now has a much better chance of rising to the top post-deal. 

Overall DFC Intelligence still forecasts that Windows phones will have limited impact on entertainment applications and games delivered on smartphones and tablets.  As reported in the DFC report The Global Market for Games and Entertainment Applications on Smartphones and Tablets, Android and iOS devices are expected to dominate among mass-market consumers.  Developers are unlikely to devote resources to the Windows phone market because it is simply too small.  The Nokia acquisition is unlikely to change the overall picture.