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Executive summary:

  • Microsoft is all set to make a U-turn from its previous objectives of acquiring Nokia's handset business.
  • It's in the best interest of the company to try and get most out of its over $7 billion acquisition by expanding the addressable market of the acquired assets and brands.
  • Nokia's handset business provides the company a chance to replicate Apple's success, but it can hurt the prospectus of Windows mobile platform everywhere else.

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The prime reason behind why Microsoft (NASDAQ:MSFT) acquired Nokia's (NYSE:NOK) mobile handset business was the fact that the company doesn't want to lag behind Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) in having complete presence in the mobile ecosystem. At the time the company made the announcement that it is all set to acquire Nokia's handset business, Google was moving ahead with an attempt to become Apple through its acquisition of Motorola Mobility, and its own branded devices. So, the company was desperate to have a device division that can ramp-up the market presence of its Windows mobile operating system, and also of its service offerings that works best on Windows platform. The company from day one was very clear about the objectives of the acquisition. As mentioned in the statement made by the company regarding the acquisition:

"Microsoft is also acquiring Nokia's Mobile Phones business unit, which serves hundreds of millions of customers worldwide, and had sales of 53.7 million units in the second quarter of 2013. Microsoft will acquire the Asha brand and will license the Nokia brand for use with current Nokia mobile phone products. Nokia will continue to own and manage the Nokia brand. This element provides Microsoft with the opportunity to extend its service offerings to a far wider group around the world while allowing Nokia's mobile phones to serve as an on-ramp to Windows Phone."

However, during last few months the situation has been changed to some extent. Google sold the handset division of Motorola Mobility to focus more on the software and services business. The reason behind the sale was to calm-down the worries of other Android smartphone makers, especially Samsung (OTC:SSNLF), that someday Google's own device division may gain an unfair advantage like early access to Android upgrades, or Google may even upgrade Android in such a way that is best suited for its own manufactured devices.

Reacting to the sale Larry Page, CEO, Google said, "This move will enable Google to devote our energy to driving innovation across the Android ecosystem, for the benefit of smartphone users everywhere,"

This move by Google on one side left only Microsoft in the race to replicate Apple's success, but on the other side showed that if a company wants to have a presence in the complete mobile ecosystem (on its own) then it may not be able to convince the other vendors (OEMs) that they will be treated at par with the company's own device division (that's what happened with the Google-Samsung relationship), which may lead to souring relationships (particularly when the company (Microsoft) want the others (OEMs) to pay for the software).

Seemingly, the company is also aware of the situation, and that is why the company is all set to make a U-turn from its previous objectives of acquiring Nokia's handset business (if the reports from all around the web are to be believed). As per the reports, Nokia is all set to launch Android operated mobile handset at Mobile World Congress, which is just a few days away.

Nokia Corp. whose mobile-device business will soon be bought by Microsoft, plans to introduce this month a smartphone powered by a version of Google's Android mobile software, according to people familiar with the matter.

Nokia engineers had been developing the Android phone before Microsoft struck the €5.4 billion ($7.4 billion) deal last September to buy Nokia's handset business and license the Finnish company's patents. It hasn't been clear before now whether Nokia would move ahead with the Android phone, expected to be introduced at the Mobile World Congress industry trade show starting Feb. 24.

Source: Wall Street Journal

Conclusion:

With the acquisition of Nokia's handset business, the company is in a situation, which is not ideal for a company that earns most of its profits by licensing its software products and wants to have a broader presence in the mobile operating system market.

If the company wants to attract the other OEMs towards Windows mobile operating system then it not only has to make Windows a better and cost-effective system, but it also has to form the partnerships that can build long-term trust and relationships. However after the acquisition, the company is founding itself in a position that may limit the presence of Windows operating system to the devices manufactured/branded by the company and Nokia. Now the company has to persuade other smartphone manufactures that they will be treated at par with Nokia (if they choose to use the company's services/software), a thing that Google failed to persuade. And, there is almost no reason to believe that the company can do so.

Not a good situation, but the company is doing its bit to correct the situation. The company is trying to get the maximum out of the acquired assets by enlarging the addressable market. To introduce a smartphone that operates on the rival operating system (Android) may well be the first step in this direction.

If actually happened, the launch will bring in the multiple benefits:

  • The biggest benefit will be that the launch will correct the biggest flaw in Nokia's mobile handset strategy, which limits its access to very limited number of mobile users. The Android is the most popular and the familiar operating system in the global market, and many users are reluctant to use the mobile with any other operating system (other than Android). With the launch, the company will increase its addressable market multifold as Android holds over 80% of the global mobile market as against below 5% market-share of Windows.
  • The move will allow the company to keep the cost of its smartphones low, as Android costs nothing in licensing free as compared to Windows that carries a price tag.
  • And most importantly, the launch will also help Microsoft to persuade other smartphone manufactures that its device business is totally independent of its software/services business, and the division is even free to use the rival technology. This could help in building some trust between the company and other OEMs, which may use Windows mobile operating system in the times to come.

End note:

Microsoft wants to establish itself in the tablet market through Surface that showed nearly $1 billion in sales (in the last reported quarter), and in the smartphone market through the recently acquired Nokia's handset business. However, more than establishing itself in the tablet and smartphone markets, the company wants to establish its Windows platform in the mobile space. But, the acquisition of Nokia's handset business limits the growth possibilities of Windows platform in the mobile space. Now the best the company can do is to try and get maximum out of its acquired assets, which the company is doing nicely (if the reports are true). So, overall an excellent development for the company and investors, as this will allow the company to tap the true potential of its multibillion dollar acquisition.

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This article reflects the personal views of the author about the company and one must consult its financial adviser before making any decision.

Source: Microsoft: Set To Make A U-Turn