Microsoft's hand was forced in Nokia deal

Microsoft’s acquisition of Nokia was a defensive move to keep the Finnish phone maker from going under or falling into the hands of an Android-first rival, several analysts argued this week.

“Had Nokia abandoned Windows Phone, then Windows Phone would be dead,” said Ben Thompson, an industry observer and independent analyst who writes on his Stratechery.com website.

Thompson was one of several analysts who read between the lines of the Nokia deal and concluded that Microsoft’s hand was forced.

On Tuesday, Microsoft announced it will pay 3.79 billion ($5 billion) for “substantially all” of Nokia’s Devices & Services business and 1.65 billion ($2.17 billion) to license Nokia’s patents.

Also included in the deal was a credit line of 1.5 billion ($2 billion) that Microsoft would extend to Nokia in the convertible bonds the latter could issue in 500 million ($658 million) chunks.

That Microsoft-funded financing was the clue Thompson seized on.

“Nokia was either going to switch to Android or was on the verge of going bankrupt. I suspect the latter,” said Thompson, pointing to the $2 billion in instant credit.

Nokia was virtually the only smartphone vendor committed to Microsoft’s Windows Phone operating system, a move it made after Stephen Elop, previously a Microsoft executive, was named CEO of Nokia in 2010. Other handset manufacturers, including leader Samsung, had either given Windows Phone only lukewarm support at best, or had completely ignored the OS to focus on Android.

“Microsoft felt they didn’t have a choice,” said Thompson. It had to buy Nokia before someone else did, and either shuttered its handset production or converted its devices into another slice of the enormous Android pie.

According to research firm IDC, Android-based smartphones will represent 75% of those shipped worldwide this year, while Apple’s iOS will account for 17% and Windows Phone will come in a distant third at 4%.

Other analysts saw the Nokia acquisition in similar terms.

“Microsoft announced that it was providing Nokia with 1.5 billion in ‘unconditional’ financing, which means that Nokia was in significant financial distress,” said Sameer Singh, a mobile technologies analyst who runs Tech-Thoughts.net. “If they couldn’t reach a deal with Microsoft, they would have to sell to another company at a far lower valuation or consider bankruptcy.”
William Stofega, who leads IDC’s mobile device technology and trends research, concurred.

“With Nokia’s stock price on a downward slide, rumors of a potential acquisition of the company by several OEMs began to circulate,” noted Stofega in a Wednesday note to clients. “An acquisition of Nokia by an OEM would have forced Microsoft to engage in an expensive bidding war for the entire company or continue to build a mobile business without the benefit of a hardware platform. Neither scenario would help restore confidence in Microsoft on Wall Street.”

All three analysts pointed out that minus Nokia, Windows Phone was dead in the water, as the Finnish firm’s handsets accounted for about 84% of all Windows Phone shipments.

Microsoft’s CEO Steve Ballmer, who two weeks ago announced he would retire in the next 12 months, acknowledged Nokia’s importance to Windows Phone and the defensive nature of the acquisition.

“A very high concentration, over 80%, of the Windows Phone business is already with Nokia,” Ballmer said in a conference call with reporters and Wall Street analysts on Tuesday. “And so in terms of evaluating paths that would ensure that we continue to see great Windows Phone devices from the Nokia team and in an attempt to really ask what’s the most sensible economic model, it made sense for us to go first party, have our own phones, to ensure Windows Phone presence.” [emphasis added]

Microsoft’s buy will effectively end any chance that other handset OEMs will keep cranking out Windows Phone smartphones or change their minds to adopt it — at least until some future point where the OS has climbed out of the cellar — but Microsoft knew that, and moved anyway.

“IDC believes that key OEM partners such as HTC and Samsung will likely feel slighted, but neither will face significant financial losses if they decide against producing future Windows Phone devices,” said Stofega. “Certainly, Microsoft built this calculus into [the] proposed transaction.”