With Microsoft-Nokia deal, Stephen Elop's sitting pretty

Microsoft’s $7.2 billion deal to buy Nokia, announced early today, makes Nokia CEO Stephen Elop the frontrunner to head up Microsoft after Steve Ballmer departs, analysts said.

Unfortunately, the deal isn’t likely to substantially improve on Microsoft’s paltry 3.3% global market share for the Windows Phone OS, they said — largely due to the dominance of Android. The tiny Windows OS market share for tablets isn’t expected to improve quickly either.

The deal calls for Microsoft to buy Nokia’s devices and services businesses and to license Nokia patents for 10 years. It is expected to be approved by regulators in various countries in early 2014.

Elop also returns to Microsoft under the arrangement, where he will lead an expanded devices team, Ballmer said in an email to employees. Elop left Microsoft to head up Nokia in late 2010.

“This deal is as much about getting Elop back to Microsoft as it is about getting Microsoft into the handset business,” said Jack Gold, an analyst at J. Gold Associates. “Getting Elop back on board as an exec is a clear statement that Microsoft needs additional ‘new thinkers’ when it comes to management and new product thinking. This puts Elop high on the list of potential successors to Ballmer.”

Carolina Milanesi, an analyst at Gartner, said Elop was already a strong candidate to replace Ballmer. But the Tuesday announcement gives Elop a “stronger chance now.”

Added analyst Kevin Burden of Strategy Analytics: “The timing is lining up for Elop [to become Microsoft CEO],” he said.

All three analysts were unconvinced the deal will improve Windows Phone market share, even though some said it is a necessary move.

“The two companies are stronger together than they were as partners, but the reality is that other vendors will not look at Windows Phone [for new products] unless things change in Android, and this deal does not change the Android side of things,” Milanesi said. According to Gartner, Android smartphones made up 79% of the global market in the second quarter, compared to 3.3% for Windows Phone and 14.2% for Apple’s iOS.

While the deal will allow for better hardware-software integration and will allow for more research and marketing money, “it also potential gives Microsoft a bigger chance to get it wrong,” Milanesi added.

“Windows Phone has the same market chances it had before the merger,” Burden said.

Gold was concerned that Microsoft will alienate other vendors of mobile phones, and even tablets, with the deal. “I am not sure in the long that buying Nokia will achieve the goal of making Microsoft a leader in mobility,” Gold said. “Microsoft now runs the risk of essentially alienating many key OEMs of mobile devices who were inclined to license Windows Phone. It may even extend to tablets.”

Gold said that Microsoft’s merger with Nokia could improve Microsoft’s competitive posture against Apple. “Apple is vulnerable to attack on this front,” Gold said.

In summary, Gold said Microsoft will still need to compete on the attractiveness of its products to end users. “Just having a device producer on board doesn’t get that, nor will having Nokia on board dramatically extend Microsoft’s ecosystem in mobility.”

Darren Hayes, chairman of Computer Information Systems at Pace University, said Microsoft had little choice other than merging with Nokia.

“Microsoft had to make this purchase to improve their poor market share,” he said. “Their failure to impress consumers with Windows 8 means that a swift, dramatic shift in strategy and management is essential.”