Microsoft has agreed to buy Nokia’s hardware division for $7.1 billion in cash. Microsoft’s a company that makes its own phones now.
Specifically, the deal is for Nokia’s Devices and Services division. 32,000 Nokia employees will join Microsoft as part of the deal. It comes about two and a half years after Nokia originally bet the farm by jumping all in with Microsoft and Windows Phone. The pairing has turned out some impressive hardware—most recently the Lumia 1020, which has the single best camera we’ve ever seen on a smartphone—but hasn’t been nearly as popular as either side had hoped. The thinking here seems to be that by bringing Nokia hardware under its roof, Microsoft can create a truly unified experience, like Apple and the iPhone.
Microsoft buys Nokia phone business and makes a big push into hardware over the past year or so. It announced the Surface just last June, and both models are due to see updates to current guts some time soon. It’s got a major release for the Xbox One coming up which will see it push the Xbox further into the living room than any console to date. And now it’s got Nokia, which completes the cycle, and means Microsoft now builds every type of device you compute on (if you consider the Surface Pro a true PC). It’s now got all the pieces it needs to wall itself off and build the One Microsoft unified experience it’s been eyeing for years. That is, if it can convince anyone to actually use its products.
Nokia’s hardware is actually a fitting parallel to Microsoft’s Surface division—wonderfully made hardware that simply doesn’t (yet) have the software or installed base or feature set required to be truly competitive, and more importantly, to be good enough and compelling enough to tempt most people away from the established alternatives, be it Android and iPhone or traditional laptops and PCs.
Consider: All of Windows Phone only accounted for 3.7 percent of smartphone shipments in the second quarter of 2013. According to Microsoft’s own projections, which it published this evening, it hopes for a 15 percent worldwide share by 2018. Microsoft is right that it’s a long game, and there is still time to catch up, but those are meager goals over a five-year period. Five years is enough time for massive favorites to fall to pieces and be replaced by newcomers. Consider: Five years ago, the iPhone was still in its infancy, and RIM was unconcerned about its place on the throne—now the iPhone is the iPhone, and BlackBerry is begging anyone who will listen to buy it up and strip it down for parts.
Nokia has been rumored to be building a 10.1-inch tablet of its own, codenamed Sirius, and resembling the colorful Lumia phones. The tablet was said to be running Windows RT, but it’s not clear how that will fit into Microsoft’s roster of Surface tablets.
To be clear: Microsoft won’t stop licensing out Windows Phone software to other manufacturers, it’ll just be making its own phones as well. This isn’t unlike Google buying Motorola, but continuing to play nice(ish) with HTC and Samsung. Still, if you thought the PC makers were mad when Microsoft announced the Surface as a direct competitor to its partners, just imagine how tough it’s going to be prying quality hardware out of HTC and Samsung, which were already lukewarm about supporting Windows Phone. In practice, this could mean Microsoft is now charged with building the only relevant Windows Phones that are being made.
One big detail that’s buried in the documents released tonight is that Microsoft, predictably, gets the right to use Nokia’s HERE maps across all of its devices. Previously, Nokia’s maps and many of their features were exclusive to Nokia. The underpinnings (in part based on Nokia’s Navteq) eventually powered all Windows Phones maps, but the ability to use the superior maps on all of its devices and services is a big win for Microsoft. It’s also a further vote of non-confidence in Bing Maps, which could be on its way out. So that’s one up on Apple, at least.
Similarly, many of Nokia’s technologies that were being used to pitch Nokia Windows Phones—think camera tech, Windows Phone apps—could now, presumably, be folded into the broader Windows Phone world. There haven’t been any announcements on that front yet, though.
One reason the deal makes sense for Microsoft is that it was getting less than $10 in software royalties per phone sold by Nokia, according to the company.
The news came late Monday night, in an open letter from Microsoft and Nokia CEOs Steve Ballmer and Stephen Elop (which comes with an adorable begging-for-a-sitcom “Steve & Stephen” sign-off). Ballmer also sent out an internal email, explaining the acquisition to Microsoft employees, along with a nuts-and-bolts Strategic Rationale document (PDF).
Elop will lead a new Devices team, and Julie Larson-Green (who briefly led the Windows division, before heading to Devices and Studios, which is handling Xbox One and Surface) will finish out her current projects before joining Elop’s team.
Buying Nokia obviously has sweeping ramifications on the future of Microsoft, but in the near-term, it could give a clue as to the next CEO as well. Last week, Ballmer announced that he would be stepping down as CEO of Microsoft in the next year, once a successor had been found to help continue Microsoft’s move into a devices and services company. And now it’s bringing in Nokia devices and services wholesale, as well as Elop its CEO. It’s early, obviously, but coming over to Microsoft in such an influential role seems to make him the favorite to succeed Ballmer.
Microsoft announced late Monday that it is buying the majority of Nokia’s cellphone unit for 3.79 billion Euros ($5 billion), and spending another 1.65 billion Euros ($2.18 billion) to license Nokia’s patent portfolio, for a total of 5.44 billion Euros ($7.17 billion).
Once the deal is done, a number of Nokia executives will join Microsoft, including Stephen Elop, a former Microsoft executive who is seen as among the top contenders to replace CEO Steve Ballmer. Also set to join Microsoft are Jo Harlow, Juha Putkiranta, Timo Toikkanen and Chris Weber.
For now, Elop is stepping aside as Nokia CEO to become executive VP of devices and services. Nokia Chairman Risto Siilasmaa will serve as interim CEO.
“For Nokia, this is an important moment of reinvention, and from a position of financial strength, we can build our next chapter,” said Siilasmaa “After a thorough assessment of how to maximize shareholder value, including consideration of a variety of alternatives, we believe this transaction is the best path forward for Nokia and its shareholders.”
The move is a clear sign that Microsoft believes it can and must succeed in the phone business, and that it cannot afford to leave the success in the hands of a partner – even one like Nokia, that had bet its future on Microsoft’s phone software.
Nokia agreed in February 2011 to make Windows Phone its primary play in smartphones, and their mobile fortunes have already been closely tied. So far, the combination has managed to pass BlackBerry, but remains a distant No. 3 platform to Google’s Android and Apple’s iOS.
“Bringing these great teams together will accelerate Microsoft’s share and profits in phones, and strengthen the overall opportunities for both Microsoft and our partners across our entire family of devices and services,” Ballmer said in a statement. “In addition to their innovation and strength in phones at all price points, Nokia brings proven capability and talent in critical areas such as hardware design and engineering, supply chain and manufacturing management, and hardware sales, marketing and distribution.”
Microsoft will dip into its large overseas cash holdings to finance the deal. At the close of the deal, roughly 32,000 employees are expected to transfer to Microsoft, including 4,700 in Finland. Nokia has about 56,000 employees not expected to transfer to Microsoft, as of the end of the second quarter.
Nokia is also selling its non-Windows Phone device business, including its basic phones and its Asha line (which are advanced feature phones or entry-level smartphones, depending on one’s perspective).
As for Nokia, while it is selling its most well-known business to Microsoft, the company will focus on its businesses making cellular networking equipment, its Here location-based services, and other “advanced technologies.”
The remaining businesses account for about half of the company’s 2012 sales.
As part of the deal, Nokia will grant Microsoft a 10-year non-exclusive license to its patents. Microsoft will license Nokia reciprocal rights to its location-based patents. Microsoft will have the option to extend the patent deal in perpetuity.
Microsoft will also license Nokia’s Here platform, and will become one of that unit’s biggest customers, paying a separate license agreement.
Microsoft has also “agreed to make immediately available to Nokia EUR 1.5 billion of financing” in three separate convertible bond deals. Nokia has the option whether to draw down some or all of the bonds. If the deal closes, any of the exercised bonds will be redeemed from the deal proceeds.
Nokia plans to hold an “Extraordinary General Meeting” of shareholders on Nov. 19. The companies said they expect the deal, which is subject to approval of Nokia shareholders and regulatory approval, to close in the first quarter of 2014.