The Nokia Acquisition


“Two Turkeys do not make an Eagle” – Vic Gudotra, Google Exec

The words of Vic Gudotra, a former Microsoft exec, now Google exec, upon hearing Nokia had selected the Microsoft Windows Phone OS over Google’s Android platform.  It makes for a nice quote and though it may seem a bit harsh given both companies performance of late in the mobile marketplace, for the interim it is pretty accurate.  With that being said this was something that had been rumoured for a long time,  It is interesting timing, given Ballmer’s retirement announcement and the massive re-org that Microsoft is going through. Ina Fried wrote a pretty interesting article on how the acquisition came to be (you can read here).   Nokia was Microsoft’s signature customer for the WIndows Phone OS, but it was never a guaranteed success.  During the entire time of this current agreement, Nokia was bleeding cash with every earnings report.  Market share was improving but it seemed very hard to sustain any momentum, when you have competitors like Google, Apple and Samsung not just increasing market share but owning the media every time they even whisper. No matter how quiet. Looking at what this relationship is and could be, is fodder for a lot of conversations and observations, moving forward this will be fun to watch.

One thing I have hated, let me please put in bold, hated is Microsoft saying there needs to be a third eco system. When Ballmer spoke about this a few years ago I was in shock, what happened to my Microsoft?  I never remembered this kind of talk when we were promoting Windows.  But as in all things in life, things change.  Even former Netscape founder Marc Andreesen says a third eco-system for mobility is necessary for the industry.  He is cheering for Microsoft.  Competition creates strange bedfellows.    Because of missteps and it reliance on its legacy, Microsoft more or less backed itself into this corner.  This ecosystem is first and foremost the developer, what Microsoft would call its birth right.  That is no longer the case as that has been eroding for years as technology advances and new and viable platforms come to market.  I have spent 20 years talking to, working with and selling to developers.  All the talk about better productivity etc… is nice but at the end of the day developers go where the money takes them.  This is an area that both Microsoft and Nokia have struggled, by coming together this could help simplify the message and opportunity for developers.

As Microsoft transforms itself into a device manufacturer the acquisition of a device manufacturer was going to be necessary.  It is one thing to say, “we are going to make devices”, it is another thing to figure out how to construct a supply chain to do it.  To hire the talent to design cool devices.  To make a device.  All skills that Microsoft was just learning.  This was an acquisition driven by necessity, by two companies struggling to compete in a space that was running away from them.  In reading Ina Fried’s article the point is made executives at both companies were becoming increasingly nervous about the fact that the Nokia Windows Phone was not creating buzz and grabbing significant market share.  This on top of the fact that unlike Microsoft earning’s Nokia was bleeding cash, Nokia does not have a Windows and Office business to hold it up.  The bigger concern was how long could hold out before it could no longer remain a viable entity.  It has not been brought up in articles I have read but the knowledge of the device supply chain is very valuable to Microsoft and unlike Nokia for the foreseeable future Microsoft has the cash to keep it afloat.

Long term it will be interesting to see how Microsoft’s relationships with its OEM’s plays out.  The OEM model that Microsoft built out under Joachim Kempin is legendary and has made billions for Microsoft and its OEM partners (Compaq, Gateway, Dell, Sony, HP, Acer, IBM, HTC, Samsung, LG and many more).  The big question is how far will Microsoft have to go.   As of today Microsoft is in  the business of creating new tablets and smartphones  Will they have to make PC’s?  Not in the foreseeable future, but those partners are being challenged as well as the PC market shrinks, what are they to do?   They will have to look at tablets, but he OS of choice by no means will be a guaranteed Windows device, especially as Android devices have an increasingly large share of the market.  The OEM’s I am sure are a bit put out as they look to new markets Tablets were going to play a big part,but  now I would say that they would be wise to hedge their bets by investing in alternate platforms like Android and Chrome. (many are already doing this).

This is the big gamble by Microsoft, it is done dipping its toes in the water with hardware project sand by acquiring a big piece of Nokia, is plunging into the icy depths in search of a bigger and brighter future.  The long run this looks like a great acquisition, but the bigger challenge will be managing the short run, the next 1-2 years.  The market will continue to move forward rapidly and is not waiting for Microsoft and Nokia to get their act together.  Approval of the deal will not be final until Q1 of 2014.  Then there is the  challenge of integrating 32,000 new employees into Microsoft.  This again will take some time.  The worry is if it takes 2-3 years to get this up and running how far will the market have moved ahead?

Will these turkey’s fly?  Will they become a great eagle?  Why are we being so harsh on the turkey?  It is very early, but one thing is clear is that if Microsoft is to become a device and services company it needed to make this acquisition.  Rather than working as separate companies, as partners, but with similar but different agendas this brings them together to work as one and set a mutual agenda.  It will also bring their different skill sets together and hopefully allow them to benefit through greater economies of scale and basic sharing of IP and best practices..  It is difficult to make these type of deals not because you want to but because you have to.  Ina’s article was very interesting in the fact that despite the situation there was a lot of executive posturing, but in the end  it had to happen otherwise it would be colossal failure by both parties. Can two turkey’s make an eagle?  We are about to find out.

Good Night and Good Luck

Hans Henrik Hoffmann September 10. 2013

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