Microsoft's (MSFT) acquisition of Nokia's (NOK) Devices & Services Business and mapping services for $7.17 billion may have come as a surprise to some, but for many tech watchers, myself included, it was fully expected. On February 11, 2011 former Microsoft executive (or maybe Microsoft Trojan horse) Stephen Elop decided he was going to replace Nokia's two operating systems (Symbian and MeeGO) with Windows Mobile. It looked inevitable that the two companies who pretty much bet their mobile futures on each other would eventually tie the knot. Just a year before the announcement, Symbian was the smartphone market leading operating system (Q4 2010, Symbian 32% to Android 30%).
That decision has to be considered one of the greatest corporate mistakes in recent history! It basically sealed Nokia's fate, and is the prime reason why Stephen Elop should not be considered for Microsoft's now vacant CEO role. I completely agree with CNBC's Andrew Ross Sorkin's comments on Squawk Box that had Nokia embraced Google's (NASDAQ:GOOG) Android platform that day instead of Microsoft's Windows mobile; it would be Samsung (OTC:SSNLF) today! It is also quite possible that today Android would be a stronger competitor in the more lucrative 'high end' smartphone market against Apple's (NASDAQ:AAPL) iPhone.
Fact of the matter is if Nokia had channeled their energy into Android, who knows where they could have taken the open source software platform. Of all the current Android hardware manufacturers, none I would say were known for any real software developments before Android was born, except for maybe Sony (NYSE:SNE) and their various videogame software development studios. Horace Dediu of the fabulous Asymco blog stated in his blog on February 4, 2011: "Nokia employs about the same number of engineers for its smartphone software platforms as Apple does for all its product lines." That's some 11,600 software engineers, an impressive figure considering the company also had 8,000 people working on hardware at the time. Nokia had the distinctive advantage of a large loyal client base to transition, a client base which has largely jumped to the other platforms when their contracts had expired or their phones stopped working. Most people I know always include an old Nokia handset among their list of favorite cell phones once owned.
The company's hardware design cannot make up for the sheer lack of usability that will continue to hold the Lumia phone back from being any real competition against the more popular Android and iOS platforms. I used a Windows phone for 30 days this summer, a Lumia 720, and the only good thing I can say about the phone (outside of the hardware, I did love its solid feel, and dropped it enough times to be amazed with its quality build) is that it makes a great conversation piece! I used to love handing the phone over to friends and asking them to try to make a phone call or even answer an incoming one. Their reaction to some of the very odd Windows characteristics turned out to be comical!
How Nokia could bet its future on something so "UN-Nokia" dumbfounds me. I look at the recent share gains in Windows phones (Microsoft CEO Steve Ballmer wrote in his letter: "Nokia Windows Phones are the fastest-growing phones in the smartphone market") that is purely based on price. Nokia phones remain a good solid looking phone given the price tag. If all a user is looking for is basic smartphone features such as web browser, email, texting and some basic apps, they will not be embarrassed to hold a Nokia phone next to their face in a public place. In my mind, the reason why Microsoft's shares are down after the acquisition is because 1+1= 1 (minus $7.2 billion of offshore cash). It's still Windows mobile on Nokia's fantastic hardware designs. It's like sending out Miguel Cabrera to hit against Zack Greinke with only a golf club in his hands, instead of his Zinger Bat. Nothing is going to change now that the two share the same corporate owners.
The only part of the deal that made any sense for Microsoft in my opinion is that the margins on the phone will increase from less than $10 per unit to more than $40 per unit. So does that mean Microsoft must sell more than 179 million smartphones to make the acquisition work? At the end of the day, from the consumer point of view, the product on Verizon (NYSE:VZ) or AT&T (NYSE:T) shelves will be no better, and arguably, could end up worse. Loss in the deal talk, was the departure of Executive Vice President of Design Marko Ahtisaari, who is set to leave the company on November 30th, 2013.
So with the industry unquestionably moving mobile, I think Microsoft has no choice but to add BlackBerry (BBRY) to its newly organized Device and Service division, and not to place Elop as head of the division (or the entire company). I would hire Apple's former senior vice president of iOS from 2007 to October 2012, Scott Forstall, to run the newly formed Device and Service group.
What's another $4 billion for Microsoft to stay relevant? (I got this $4 billion number by paying up ~30% from BlackBerry's current share price and removing the $2.875 billion in cash and investments the company has). In my view, BlackBerry's operating system is far superior to Windows mobile. Also BlackBerry's 70 million users would most likely rejoice if they had access to the Windows Marketplace and Ecosystem. Combine these three companies' strengths together and 1 +1 +1 could equal a respectable 3 or higher in the duopoly that is the current smartphone market.
I think BlackBerry's software team, which created some innovative features in BBX10, add what's left of its enterprise base, coupled with Nokia's hardware and software design that's simple, clean and functional trademarks of Scandinavian engineers and designers, along with Microsoft's current ecosystem (Xbox, Office, Windows Marketplace, Cloud, Enterprise, MSN) could give the combined group a fighting chance against Apples iOS and Google's Android and what I believe to be an upcoming push by Samsung and the open source Tizen operating system.
As it stands, Microsoft's acquisition is just a financial transaction, no more, no less as nothing has changed for the end user.
So I ask again, what's another $4 billion of Microsoft's $65 billion plus cash hoard to help it protect its $270 billion market cap? I hope Microsoft realizes that what was purchased today for $7.17 billion once had a market cap of $270 billion! Oh how things can change quickly when you're no longer the operating system that had OEM contractually obligated to install it on every device they sell.
When you give people a choice, the choice is clear, they don't want Windows Software, unless it's very cheap. It's time for Microsoft to realize that and step up and buy BlackBerry, and I think just as importantly, hire Mr. Forestall to combine the best of each company and add new elements.
Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.