Buying Nokia's phones will make Microsoft's Devices and Services plan work

Stephen Elop on stage in Espoo, Finland, announcing Microsoft's purchase of Nokia's devices business. Credit:Simon Bisson/Nokia

The news that Microsoft is buying Nokia’s devices business wasn’t as much of a surprise as it might have been. Even so, tuning in the the Nokia conference call from Finland this morning, it was clear that the decision had been a hard one for Nokia’s management. Interim Nokia CEO Risto Siilasmaa described it as rational “but emotionally complex”. Talking to press in Nokia’s Espoo headquarters, Siilasmaa referred to the rapidly changing mobile market, “The industry is becoming a duopoly; many established players have disappeared or made difficult choices”.

Explaining the choices Nokia had made, Siilasmaa went on to discuss the dilemma faced by both Nokia and Microsoft that was the basis of the deal, “We cannot expect other device vendors to invest as Nokia has grown to dominate the Windows Phone ecosystem. Microsoft does have the resources, but they lack the business model that allows them to gain an improved return on significant incremental investment. If Microsoft would have to invest $20 to sell one more device and would earn $10 in licensing fees as a result, there is no incentive to invest.”

Microsoft’s shift to become a devices and services company with the launch of Surface was the catalyst for the acquisition, along with the resulting shift in the Windows ecosystem. As Siilasmaa noted, “Over the months of analysis Nokia has learned that in today’s market, the best opportunity for the device business to prosper is to be tightly aligned with the operating system and the associated ecosystem and cloud services.”

Stephen Elop, the outgoing Nokia CEO defended the strategy that had brought Nokia to this point, “While the decisions we made - and the forcefulness with which we made them - will be debated for many years, there is no doubt in my mind, that those actions are what have given us the opportunity to continue to improve our fortunes”. He noted the changes that had been made in the company’s notoriously conservative culture, “We have been going faster than Nokia ever has before”, changes that had led to the Microsoft/Nokia partnership becoming an influential part of the Windows Phone ecosystem, and where, as Elop said, “Achieving our goal of becoming the third ecosystem is becoming very real.”

There still remains a sense of urgency, as Elop emphasized, “But we have to go even faster, we have to accelerate.” He continued, “We need more combined muscle to truly break through with consumers”. Where Elop sees benefits for Windows Phone as a brand was clear, “Building on this steady growth of Lumia this transaction helps Windows Phone and our devices increase share through faster innovation, better products, and unified branding and marketing”

One thing is clear from the Espoo press conference: Microsoft isn’t giving up on Nokia’s featurephone business, and its Asha devices. Stephen Elop described them as “an on-ramp to Windows phone”. What we can expect though is deeper integration with Microsoft services, especially Bing. That’s an important move for Microsoft, as it puts them head to head with Google for search and service mindshare in emerging markets. As Elop puts it, it gives Microsoft an opportunity it hadn’t had before, one where, “Microsoft can extend its service offering to a far wider group of people around the world.”

Using Asha as an on-ramp for Windows Phone also means it’s an on-ramp for the rest of Microsoft’s devices platform (especially as the app ecosystems of Windows and Windows Phone start to converge). Moving from Asha to Lumia to Nokia’s rumored Windows RT tablets and then to Surface makes a lot more sense when there’s a single application and services ecosystem wrapped around a collection of platforms.

It’s an approach that should go a long way to reshaping Microsoft’s devices business, with Finland due to become the centre for Microsoft’s mobile device research and development. Steve Ballmer expects it to, as he put it, “Accelerate phone share”. In the meantime, while the deal is concluded, he expects the two companies to continue working together the way they have over the last few years, “We will continue to build and ship phenomenal phones together.”

Addressing issues around integration, Ballmer noted that previous acquisitions had kept staff in their original location, “We have no significant plans to shift work around the world. We want it done where it is done today.” That’s certainly been the case with Skype, where development remains in London and Estonia, with Navision in Denmark, and with FAST in Norway.

Divesting its devices business makes sense for Nokia to. With its recent purchase of Siemens’ share of its joint-venture networking company, Nokia can concentrate on the task of providing and developing the networking equipment that’s needed for the global rollout of 4G networks – and of providing the Internet infrastructure needed to bring the next two billion users online.

With Steve Ballmer’s retirement, from Microsoft does this mean that Stephen Elop is a shoo-in for the top job at Microsoft? While that remains a possibility, as the new head of Microsoft’s devices business, he’s got a more important role to fulfil: bringing the lessons he’s learnt at Nokia back into the rest of Microsoft.

Nokia is at heart a functional organization, much like the new organization that Steve Ballmer’s “One Microsoft” reorganization is trying to create. As Microsoft moves to delivering devices and services, bringing those two disparate parts of its businesses together is crucially important – along with supporting third party devices and services. That’s a lesson that Nokia has learnt over the years, first with Symbian and later with its HERE mapping platform. Elop will need to inculcate those ways of working in his new, expanded, division.

That’s a significant challenge, and one that’s going to set the scene for Microsoft’s next five years or so. Bringing together so many near-independent business units into a single way of working isn’t easy, but having an internal benchmark in more than 30,000 Nokia employees experienced in the politics and processes of functional operations will do much to shift the balance.

However that’s all in the future. The next six months will be critical, as the two companies look for regulatory and shareholder approval for their transaction. With the precedent of Google’s Motorola acquisition that’s likely to be easier than it might have been, but integrating two organizations will still be a difficult process.

Ballmer described the merger as “A signature event in our transformation.” That’s likely to be an understatement. Whatever the result, the acquisition of Nokia’s devices business will affect more than just Microsoft. As Elop said, “We are a challenger, and as the news ripples around the world today, we will be recognised as an even greater challenger to our competitors tomorrow.” It’ll be interesting to see just how the industry responds to that challenge.

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