Robert McLaws: Windows Edition

Blogging about Windows since before Vista became a bad word

Thoughts on Microsoft's Acquisition of Nokia

So, wow, right? I heard the same rumors you did, but I honestly didn't think it would happen. My thought process initially thought it was a bad idea for Microsoft, as Nokia has driven Windows Phone innovation externally, and provided the kick in the butt that the lagging OS division needs. But I hasn't been thinking of the bigger picture. Well, after hearing of the transaction last night, and reviewing the materials today, not only do I think it's a good idea, but I think there are a number of details that journalists are missing. So I thought I'd take a few minutes and lay them out.

Microsoft just re-imagined how it recognizes revenue for the Devices division
This may be the singular most important part of the transaction that no one is talking about. In keeping all of the existing facilities, Microsoft now has a significant footprint for Devices in a tax-friendly European country, giving Microsoft a legitimate way to recognize more than $1B a quarter through a new European subsidiary. This avoids the massive tax increases that have been and are continuing to take effect in the US for a growing revenue base of Android and Windows Phone revenue. Depending on how the operation is structured, they might even be able to recognixe Xbox and Surface revenue though this subsidiary. This could be a massive win for the company on a tax front, while obviously being a great loss for the US Government. Heather Timmons has more on the tax implications.

Microsoft significantly increased it's manufacturing capabilities
Microsoft sells a lot of hardware already. Between keyboards and mice, Xbox, and Surface, Microsoft has significant need for production facilities. It typically outsources practically all of those functions, but now it just bought a global, functioning manufacturing division. Microsoft now owns Nokia's worldwide production facilities, including contracts with all of Nokia's suppliers. This will have a significant impact on Xbox and Surface, from allowing Microsoft to buy similar parts at lower prices, to expanding these facilities to manufacture and/or assemble Microsoft's other products in-house. The impact of that on Microsoft should not be underestimated. Nokia was already manufactuting a very strong Windows tablet competitor for launch in the next 60 days. That device, and others like it, will likely still launch, but they might not see future iterations as that design experience is integrated with the Surface team. Oh, and the Lumia 41MP camera in the Kinect? YES PLEASE.

UPDATE: Now, some people are writing stories that Nokia made this sale so they could sell Android phones in 2016 when the agreement for Nokia not to make it's own smartphones expires. I'm not going to link to those articles, because that is a stupid idea. Why on earth would Nokia sell it's production facilities if it planned to make phones again someday? It's not going to rebuild an entire 30K-employee supply chain just to re-start something they were already doing. Nokia is out of the phone manufacturing business. Period.

Microsoft is a year from the entire Windows Phone division breaking even
Nokia sold 7.4M Windows Phones last quarter, which equates to 29M phones over the next 12 months if growth suddenly drops to zero. That means that Microsoft only needs to double it's current Lumia sales (at 78% growth rate, that won't be a problem) for the entire division to break even. That is HUGE for shareholders, who have been needing to see this division see some key successes.

UPDATE: And this doesn't include feature phones. According to Reuters, though Nokia has only 5.8% of the total smartphone market, it is the second largest mobile phone company in the world, behind Samsung. You wanna know why the Apple folks are screaming bloody murder? Because in one fell swoop, Microsoft bought a company with a worldwide presence in phones that sells more devices that make calls than Apple. Sure, many of those phones are $20 dumbphones. But Microsoft now owns a major on-ramp for getting those people onto Windows Phones, an on-ramp that Apple and Google do not have.

Microsoft just became a mobile patent behemoth
The deal sends over 1/4 of Nokia's 30,000 patent portolio to Microsoft. They also just assigned Microsoft as beneficiary to 60 patent agreements they have with other companies, including Qualcomm, IBM, Motorola Mobility, and Motorola Solutions. Combined, Microsoft will now have one of the most, if not the most, extensive patent portfolios in the smartphone industry. This will pad the bottom line on the devices division, which already makes more money from the Android OS than it does from Windows Phone. It will also drop the cost of the Windows Phone OS license to Samsung, LG, HTC, and others. And, as Alan Griver points out, Microsoft now sells 60M phones a year across Lumia, Asha, and feature phones. UPDATE: Florian Muller of has more on this in Part 1 and Part 2.

Microsoft just bought a smartphone OS
Nokia had ditched its Meego operating system, and had focused on an Asha OS for lower-end feature phones, and Windows Phone OS. That Asha operating system just moved over to Microsoft, and will continue to be released on low-end feature phones. This is a huge win for existing Asha customers, as it is likely that more Microsoft services and applications will be coming to that system. How this all plays out for the rest of the ecosystem remains to be seen, but Microsoft loves software, and there are likely some innovations in the Asha codebase that will make their way elsewhere.

Bing Maps is dead-ish, HERE Maps data is coming to Azure
On the heels of Nokia's recent announcement that they would be licensing Microsoft technology for a new in-car OS and mapping experience, Microsoft is now a licensee of the HERE Maps platform. With Nokia's sale of the devices business (where it may never have dominated again), they can now focus on mapping technologies, where they are arguably positioned to be #1 in the industry. Bing Maps had also already announced their technology would be phasing out Bing Maps products on Windows 8 and the web, in favor of HERE Maps apps. But now, Bing can focus their work on other areas while leveraging Nokia's superior mapping data, and more importantly, Bing Maps data currently available to 3rd party developers will be supplanted with HERE Maps data delivered through the Windows Azure Datamarket. This, combined with the announcement that Microsoft will build an Azure datacenter in Finland, means that HERE Maps is likely to move most if not all of their infractructure to Azure, which will be a huge win for Microsoft and Azure's growth.

The Surface Phone is likely dead
Most of the arguments towards building a Surface phone centered around Microsoft needing to have an in-house Windows Phone brand to really showcase the power of the device. Well, the Lumia brand is already fantastically well-established with its current userbase, and so it is unlikely that Microsoft woudl take a PC computing brand and extend it to smartphones. However, can you picture a gracefully-curved Lumia phone with a thin, light, and tough VaoprMG case? Hell yes you can. ;)

Very exciting time for Microsoft. They are in the middle of this huge transformation for the company, and I'm excited for what's coming. Things are looking up!



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