Source : online.wsj.com
By : Shira Ovide
Category : Small Business SEO
Microsoft Corp. MSFT -4.55% struck a $7 billion bargain with Nokia Corp. NOK1V.HE +33.94% to bolster a mobile future for the software giant. But the odds are long that a deal can reverse the fortunes of two laggards in a cutthroat market. Microsoft is wagering a purchase of Nokia’s phone business will help the companies crack a problem they couldn’t as partners: attain the dominant smartphone positions of Apple Inc. AAPL +0.28% and Google Inc. GOOG +1.59%
After nearly three years of working with Nokia, Microsoft is a distant No. 3 in smartphones world-wide, with its mobile software accounting for about 4% of the market compared with a combined 90% share for Apple and Google software. Nokia’s smartphones make up a negligible share after commanding nearly half of the market before Apple’s iPhone arrived. For Microsoft to make any headway, it must now create mobile devices that attract both consumers and business buyers, find its footing in hardware manufacturing and win over skeptical shareholders and app developers, all the while successfully integrating 32,000 Nokia employees with Microsoft’s 100,000.
Microsoft investors didn’t exactly show their faith on Tuesday, sending the company’s shares down 4.6% to $31.88. The decline erased the stock bump that came after Chief Executive Steve Ballmer recently announced his retirement. Mr. Ballmer argued Tuesday that Google and Apple don’t have a permanent lock in the mobile business. Microsoft also is working from a position of financial strength. The company generates more than $70 billion of annual revenue, and the Nokia acquisition will barely dent Microsoft’s $77 billion cash stockpile.
Mr. Ballmer said on a conference call with analysts that he believes Microsoft needs to become a hardware maker rather than making other companies responsible for computers, phones and other gear that run Microsoft software. “For us to really fulfill the vision of what we can do for our customers, we have evolved our thinking,” Mr. Ballmer said.
Accomplishing a complete transformation into a hardware maker will require a very different kind of company than Microsoft is today. “Historically, I’ve always seen Microsoft as the place where mobile technology goes to die,” said Michael Morgan, a mobile-industry analyst with ABI Research Inc. “I’m just not entirely sure if this closer owner relationship will allow them to make better phones than under their previous alliance.”
Microsoft risks shrinking to a shell of itself if it doesn’t figure out mobile devices, which are supplanting PCs as people’s computing gateways. But while Mr. Ballmer called the Nokia deal a “bold” move to undo its lowly mobile position, there are land mines everywhere for his agenda. The Nokia deal appeared to do little on Tuesday to stoke more interest among app developers, who are critical to helping Microsoft close a large gap in the offerings on its Windows smartphones. “We simply can’t devote any resources to support the platform. It’s too small,” said Patrick Geuder, the head of business development for videogame maker Minecraft. The popular game is available for iPhone and Android smartphones, and for Microsoft’s Xbox.
Mr. Ballmer reiterated Tuesday the belief inside of Microsoft that the best way to lure app developers is to sell many more Windows Phone devices. Microsoft has scant experience in making gadgets beyond its Xbox game console. Mr. Ballmer’s successor must branch beyond sales of high-margin software that generates all of Microsoft’s profit, while finding footing in the fiercely competitive and low-margin hardware business. Microsoft’s first stab at a homegrown computer, the Surface tablet, failed to spark a sales rush after it launched last year. Microsoft took a $900 million charge last quarter for unsold Surface inventory.
Microsoft may get less help now from other major handset companies, most of whom kept quiet about the deal on Tuesday. Nokia has been the dominant maker of Windows smartphones, while other major phone makers, including Samsung Electronics Ltd. 005930.SE +0.60% and HTC Corp., have devoted their attentions to market-leader Android. Microsoft’s purchase of a rival handset maker makes it even less appealing for Samsung and others to treat Microsoft as anything other than a mobile afterthought. Mr. Ballmer said Microsoft will remain committed to its hardware partners.
The union of Nokia and Microsoft also means Mr. Ballmer’s successor will have to carve out a middle ground in the market between cheap and cool. For now, smartphones powered by Microsoft’s Windows Phone operating software are neither affordable enough to appeal to cost-conscious mobile buyers opting for Android phones, nor slick enough to win over fans of high-cost gadgets from Apple and Samsung.
Microsoft also will have to keep its current employees happy while welcoming a raft of newcomers. The Nokia deal is the second-biggest acquisition Microsoft has ever done, behind its $8.6 billion purchase of Internet communications service Skype in 2011. Microsoft also risks internal strife with its plan to hand over command of the company’s enlarged hardware business to Nokia CEO Stephen Elop. The return of the former Microsoft executive makes him a contender for Mr. Ballmer’s job, and he is supplanting another Microsoft executive in the hardware operation.
Nokia and Microsoft have been battling the dominant smartphone positions of Apple and Google. Above, a Nokia Lumia 610 smartphone
Microsoft is betting on a company whose own mobile fortunes weren’t bright. Nokia was a pioneer in smartphones but it rapidly lost ground to rivals like Apple and Samsung. Nokia had a 35% share of all smartphones in 2007, when the iPhone was just getting off the ground and the business was dominated by BlackBerry and Microsoft, according to Euromonitor International.
By 2012, Nokia was responsible for less than 6% of all smartphones sold. Samsung also overtook Nokia last year as the world’s biggest seller of all mobile phones, including basic models like flip phones. As a result, Microsoft’s price tag to take over Nokia’s mobile business—€3.79 billion, or about $5 billion—is a fraction of the business’s revenue.
Last year, Nokia generated nearly half of its €30.2 billion in sales from the mobile-handset segment Microsoft is buying. Microsoft also agreed to pay more than $2 billion to license Nokia’s patents in digital mapping and other areas. Moreover, the Nokia deal threatens a fragile peace with Microsoft stockholders. It was announced just after Microsoft averted a potential proxy fight by activist shareholder ValueAct Capital Management LP, which was granted a board seat in return. On the one hand, investors say Microsoft needs to find an answer for its lagging mobile phone business. But investors also want Microsoft to curtail spending on under performing businesses. At least one Microsoft investor said Tuesday that he was angry at Microsoft for making the acquisition on the heels of the ValueAct board arrangement.
“The facts clearly suggest that the board choreographed the timing of the Nokia deal to both mislead and silence a well-respected investor, and shareholders have every right to be irate,” said Jonathon Jacobson, CEO of investment firm Highfields Capital Management LP, which has disclosed owning $167 million in Microsoft stock. ValueAct CEO Jeff Ubben didn’t respond to an email seeking comment. A Microsoft spokeswoman declined to comment.
Source : online.wsj.com/article/SB10001424127887324432404579052112731349626.html