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Why Microsoft has much work ahead after acquiring Nokia

Anupama Shukla

Must-know: Microsoft's 2014 earnings review (Part 5 of 13)

(Continued from Part 4)

Microsoft finalized its acquisition of Nokia In April 2014, Microsoft (MSFT) completed the acquisition of Nokia, once a mobile device market leader. This move is in line with Microsoft’s “mobile first, cloud first strategy.” The acquisition was finalized for $9.5 billion, much higher than the planned $7.2 billion that included a ten-year–associated patent-licensing agreement. Did Nokia really fit? Nokia’s acquisition was decided before Satya Nadella took over Microsoft. Smartphone leaders like Google (GOOGL), Apple (AAPL), and Blackberry (BBRY) all have their own hardware manufactured in house. The launch of Windows Phone showed that Microsoft wanted to be part of this league. So it acquired Nokia. However, vendors haven’t taken too well to the Windows Phone. Nokia still commands respect and expertise in the market. It could have boosted the Windows Phone’s innovation and sales. But the Windows Phone’s sales failed to create any stir in the market. The business climate has also changed with leading players relying on third parties to take care of hardware, the recent case being Google’s sale of Motorola to Lenovo. Nokia blamed for the fall in growth In Microsoft’s earnings report of the fourth quarter of 2014, management blamed Nokia for the drop in earnings or net profits. Absorption of Nokia led to a fall in 8 cents per share. Restructuring and tax related items contributed another 3 cents per share. Microsoft’s acquisition of Nokia impacted iShares U.S. Technology ETF (IYW), which has significant exposure to Microsoft. Restructuring of the Nokia purchase Microsoft Mobile Oy became the subsidiary of Microsoft after Nokia’s acquisition. It will now be responsible for Lumia, Asha, Android-based Nokia X phones, and other unspecified devices. As a part of the deal, Microsoft acquired 8,500 design patents pertaining to phone manufacturing from Nokia. Microsoft also agreed to licensing another 30,000 “utility” patents from Nokia for the next ten years, with the option of renewal. Microsoft has stopped supporting Nokia’s Android plan. It plans to convert select Nokia X product designs into Lumia devices. These devices will run Windows Phone and not Android. Microsoft claims that this step is in line with its focus on Windows Universal apps. Rapidly growing mobile market According to Forrester Research, there will be 1 billion smartphones and tablet users worldwide by 2016. Together, Apple, Google, and Microsoft will cater 90% of the demand, along with their respective platforms. Microsoft expects Nokia to break even by 2016 as per its latest fourth quarter of 2014 earnings release. The company’s recent Nokia layoffs and the decision to stop supporting and funding X2, a low-cost Android phone, indicate that Microsoft is all geared up for the rapid and lean transformation.

Continue to Part 6

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