On September 3, 2013, Microsoft (NASDAQ:MSFT) announced that it was set to acquire Nokia's Devices and Services business for $7.2 billion, while continuing to license patent and mapping technologies from the Finnish firm. In retrospect, this move was the inevitable conclusion of a partnership that began in 2011. At that time, Nokia (NYSE:NOK) and Microsoft announced plans to build out a global mobile ecosystem together. It was then assumed that Microsoft would put up the Windows operating system software in exchange for unrivaled access to Nokia hardware and intellectual property. The Microsoft-Nokia acquisition deal is expected to close during the first quarter of 2014.
The tablet regimes out of both companies, however, will only confuse the marketplace. Interestingly, the Apple iPad Air, Nokia Lumia 2520, and Microsoft Surface 2 tablets all launched at the same time, on October 22, 2013. Nokia unveiled its Lumia 2520 tablet in Abu Dhabi, far removed from the glare of The West. In all likelihood, this awkwardly timed Lumia 2520 launch will remain out of sight, and out of mind, within the most critical American market. Microsoft has remained mum in regards to its future plans for the Nokia tablet. In either scenario, however, Microsoft stock will be dead money over the long term.
Nokia Lumia 2520 Tablet Specifications
The Nokia Lumia 2520, of course, will be immediately compared to the Surface 2 tablet. The Lumia 2520 combines bold, yet playful Nokia hardware design, above the somewhat utilitarian Windows 8.1 RT software programming. Nokia offers up its Lumia 2520 tablet in multiple colors that include fire red, Carolina Blue, and black. The tablet weighs in at 615 grams and features separate back-and-front cameras. A Qualcomm (NASDAQ:QCOM) Snapdragon 800 quad-core 2.2 GHz chip can drive this Nokia machine through 25 days worth of standby battery life. The Verge is speculating that AT&T (NYSE:T) and Verizon (NYSE:VZ) outlets will retail the Lumia tablet. All Nokia tablets will offer both 4G LTE and Wi-Fi connectivity. Without a carrier subsidy, the 32GB Nokia Lumia 2520 is priced out at $499.
Microsoft Surface 2 prices range between $449 and $1,799. Interestingly, Microsoft has actually pitted its Surface 2 in direct competition against both the Apple iPad tablet and MacBook Air, alongside the Lumia 2520 work of its future Finnish employees. This second iteration of the Microsoft Windows tablet actually branches off into two separate wings, in the Surface 2, and the Surface Pro 2 tablets. The Surface 2 may be described as the starter model that offers 32GB and 64GB in storage. The top-of-the-line 512GB Surface Pro 2 retails for $1,799. The premium Surface Pro 2 also packs 8GB RAM in built-in memory. For the sake of comparison, Apple's 13-inch MacBook Pro featuring 8GB of memory and 512GB of storage also retails for $1,799. The Intel Core i5, or Haswell, chip powers both the Surface Pro 2 and MacBook Pro.
Microsoft markets its Surface platform as "the one device for everything in your life." Meanwhile, Nokia bills its 2520 tablet as "one experience for everything in your life." The overlapping technical specifications and marketing terminologies out of both Microsoft and Nokia may only add to what Lance Ulanoff and Mashable would describe as "confusion." Prospective buyers may reject the Windows line altogether due to implicit fear of a lack of ongoing complimentary applications and support. This literal tablet town is not big enough for two hybrid Windows machines to live and thrive.
Windows 8 and 8.1
Nokia has made the interesting decision to maintain the much-maligned RT operating system within its Lumia tablets. Numerous technology analysts have mocked the RT as a stripped-down version of Windows 8 and Windows 8.1. Although a relatively risky endeavor out of Microsoft, market responses to both Windows 8 and 8.1 confirms the idea that Metro was far from revolutionary. Metro, or the modern user interface, may be described as a fusion of traditional desktop, smartphone, and tablet features. Woody Leonhard of Info World and Dan Rowinski of Tab Times went on to rip Windows 8 and the original Surface as a "boondoggle." Microsoft now faces a class action lawsuit out of angry shareholders railing against the "disastrous" launch of Windows RT that resulted in $900 million worth of Q4 2013 inventory write-downs at Microsoft. The Associated Press recently labeled Windows 8.1 as "far from perfect." Slight improvements within Windows 8.1 will do little to move the pendulum of RT brand perception away from the term "debacle" and towards delivering sales into the Nokia column.
On August 5, 2013, research firm IDC released data summarizing the size of the global tablet market through the second calendar quarter of 2013. The lead into the IDC report claimed that the table market contracted by 9.7%, in terms of shipments, upon a sequential basis. IDC cited anticipation for Holiday Season iPad launch as the primary factor behind the Q2 2013 contraction. Blaming tablet market decline upon the postponed iPad launch date, however, may prove to be wishful thinking. Ironically, Hayley Tsukayama and The Washington Post recently described the tablet market as "suddenly very crowded." Tsukayama went on to disclose that Amazon (NASDAQ:AMZN) founder Jeffrey P. Bezos now owns The Washington Post. The Amazon Kindle Fire HD tablet begins at $139. Amazon has remained infamous for offering product at-cost, in order to drive traffic towards its online site and higher margin goods and services.
The Nokia Lumia 2520 tablet is therefore destined to fight a losing war upon multiple fronts. At the top-end, expensive Apple iPads and MacBooks are notable for brand appeal and quality of user experience. At the low-end, all Windows tablet machines are at risk of being undercut by offerings out of Samsung (OTC:SSNLF), Google (NASDAQ:GOOG), and even Amazon. The IDC information did confirm the dominance of the Google Android-Apple iOS duopoly above the tablet market. Taken together, Android (28.2 million shipments) and iOS (14.6 million shipments) systems combined to operate 42.8 million Q2 2013 shipments. Google Android and Apple iOS then controlled respective 62.6% and 32.5% shares of the tablet market. For the sake of comparison, the Windows RT operating system accounted for a mere 200,000 tablet shipments during this latest quarter. Most likely, the Nokia Lumia 2520 will go the way of the BlackBerry Playbook, as a virtual non-factor within the tablet market.
The Bottom Line
Turnaround efforts at Nokia are gaining steam. According to The Wall Street Journal, sources familiar with the matter have indicated that Nokia sold more than 8 million Lumia phones during its latest third quarter. Value Nokia Lumia 520 and Lumia 620 handsets have been selling well in Europe, where the Windows system now operates roughly 10% of this geographic smart phone market. The Nokia Devices and Services may be turning the corner towards profitability, as the division posted $103.6 million in semi-annual 2013 operating losses. This performance was a sharp improvement over the prior year, when Nokia Devices and Services had already taken $1 billion in operating losses during the same semi-annual time frame.
Going forward, however, advancements in Nokia engineering may be sabotaged due to both clashes in culture and the Law of Large Numbers. Again, Microsoft has remained eerily silent with regard to its future plans for the Nokia Lumia 2520 tablet. At best, Microsoft will split marketing dollars and support between the Surface and Lumia tablets. At worst, corporate politics and infighting will ultimately result in Microsoft effectively abandoning this Nokia tablet, as Hewlett-Packard (NYSE:HPQ) has done with much of the Palm hardware. Nokia Lumia handsets, of course, will smoothly transition into the Microsoft business line.
Microsoft has averaged $68 billion in annual revenue over the past five years. On October 25, 2013, Microsoft stock tacked on 6% gains to close out the trading session at $35.73, upon news that the company generated $5.24 billion in profits upon $18.53 billion in Q1 2014 sales. Wall Street analysts, however, have been quick to point out a $2 billion decline in short-term unearned, or deferred, revenue at Microsoft between fiscal Q4 2013 and Q1 2014. Microsoft revenue and net income would have been flat on a quarter-to-quarter basis had the company not have moved to recognize said amount of deferred revenue on the balance sheet and shifted it over to the income statement. Microsoft shareholders have been left to deal with negative real returns over the past fourteen years. The Microsoft acquisition of Nokia and its Lumia 2520 tablet will do nothing to change this trend.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.