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Microsoft buys its way into the mobile device market, gains Nokia exec

Microsoft's $7.2 billion Nokia acquisition gives Microsoft smartphone device access but industry skeptics wonder about the long-term strategy.

Microsoft has bought its way into the smartphone device market with the acquisition of Nokia this week, but analysts and end users are skeptical as to whether the move gives the company a strong foothold there.

The company disclosed the pending $7.2 billion acquisition of Finland-based Nokia's devices and services business, which includes Microsoft Windows Phone handsets.  The transaction will close in the first quarter of 2014.

Microsoft said the acquisition of Nokia will accelerate the growth of its share and profit in mobile devices through faster innovation, unified branding and marketing.

The company has struggled to make its way in the mobile market, with under-sold Surface tablets and the Windows Phone platform a distant third in operating system market share behind Apple's iOS and Google's Android devices.

Some IT industry insiders say buying Nokia won't make Microsoft a leader in the mobility space.

“They bought the rock on the bottom of the pond. Now they are going to try and make the rock float,” said Mike Drips, an IT professional in Houston who specializes in Microsoft platforms. “I don’t see them gaining much of anything with this."

The acquisition also puts Microsoft squarely in direct competition with its smartphone hardware partners, most notably HTC and Samsung, and is at risk of alienating any other future Windows Phone handset makers, although it buoys its own company tagline of being a devices and services company.

"Microsoft will lose all other OEMs who are making devices at the moment, even if they only had 20% of the market, they will shrink to zero," said Brian Katz, head of mobile innovation for a large pharmaceutical company based in New Jersey.

The purchase "pits Microsoft against Samsung in what portends to be a big ecosystem fight," agreed Bob Egan, CEO and chief analyst, Sepharim Group, a mobile consulting company based in Falmouth, Mass.

Acquisition details:

  • Cost: $7.2 billion
  • Transaction closing: First quarter 2014 subject to approval
  • Employees affected: 32,000 Nokia employees transferred to Microsoft
  • Licensing: Chief Technology Office and patent portfolio remains in Nokia Group but Nokia grants Microsoft's 10-year non-exclusive license to its patents at time of closing; Nokia provides Microsoft with its long-term Qualcomm licensing agreement; Microsoft becomes a strategic licensee of the HERE mapping services platform and pays Nokia for a four-year license
  • If the deal fails: Microsoft will pay Nokia U.S. $750 million if the deal does not pass regulatory clearances

Microsoft-Nokia acquisition excludes patents

Microsoft will license Nokia's patents rather than owning them outright as part of the purchase --  a prudent decision, analysts said.

"This has as much to do with the long-term viability of the patents…but also it's about wanting to avoid the potential litigation around monopoly that Microsoft could face [as] Nokia patents are licensed by many other vendors," said Jack Gold, principal analyst, J. Gold Associates, a consulting firm based in Northborough, Mass.

Many Nokia patents are reaching end of life and have diminished capability for generating future royalties, he said.

"[It is] much cleaner just to license the patents without the baggage," he said.

Skepticism abounds whether the acquisition lays a solid foundation for a good long-term strategy for Microsoft.

"The question becomes, can the Nokia acquisition push the OS team to move faster as the hardware has been coming much faster," said Katz. "If they can, we will see a much better marriage between the hardware and OS, which could bode well.”

Important enterprise class features such as mobile device management, private application distribution, company accounts, VPN, Bluetooth 4 and a new notification center are still missing from the Windows Phone platform, but acquiring Nokia doesn't mean those gaps will be filled, Egan said.

"It gives Microsoft more direct control but I'm not sure it's control they couldn't have already capitalized on – and have not," said Egan.

Drips, who regularly advises large IT shops on their mobile strategies, said he rarely sees application development work for Nokia devices. Most companies focus their efforts on Apple and Android devices instead.

Will Elop take over for Ballmer?

As part of the acquisition, Nokia CEO Stephen Elop, a former Microsoft executive, will become executive vice president of the devices and services division. The acquisition clearly demotes Julie Larsen-Green who was running the devices and studios group and now reports into Elop. Larsen-Green also was seen as a contender for Microsoft's top job.

"It's as much about getting [Stephen] Elop back as it is getting into the handset business," Gold said.

The deal gives Elop a stronger political foothold to lead Microsoft upon Steve Ballmer's retirement, but there is some contention around whether Elop should take over as Microsoft CEO.

"I don't think Stephen is the right guy to lead Microsoft out of the abyss," said Egan. "Elop is a good guy but a very tactical thinker. Microsoft needs a bigger thinker, with an ability to articulate a big vision and execute."

James Furbush contributed to this story.

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