Nokia Corporation's (NYSE:NOK) worst enemy might just be its so-called partner, Microsoft Corporation (NASDAQ:MSFT). The software giant just announced that Windows Phone 8 will not be able to run on Lumia phones. That would make it even harder for Nokia to sell the Lumia phones, which could send its shares even lower.
Lumia has hardly been a success: the Wall Street Journal reported that Nokia has only sold around two million of the phones since they came out last year. That is a paltry number compared to the 35 million iPhones Apple Inc. (NASDAQ:AAPL) has peddled during the same period. The numbers are even worse when compared with Google Inc.'s (NASDAQ:GOOG) Android. The best-selling phones in the world are now Android smartphones that are manufactured by Samsung (005930 in Seoul).
The alliance between Nokia and Microsoft was supposed to save the former and help it regain its edge. Instead, all Nokia has done is lose its market share. Microsoft has not done anything but help itself at Nokia's expense. Nokia has not taken any steps to defend its market position, even though some of its technology and its reputation could help it regain market share.
Nokia's smartphone sales fell by 52% in the last year, largely because consumers dislike its Symbian software. Nokia had planned to replace Symbian with Windows 8, but Microsoft no longer seems to be cooperating in that deal. Instead, Microsoft has taken yet another step that could further damage Nokia's stock value.
Microsoft Dumps Nokia for Huawei
The software powerhouse has made a deal to let Chinese hardware maker Huawei Technologies put Windows 8 on its phones. The Wall Street Journal speculated that this would allow Microsoft to enter the low-end smartphone market and compete directly with Android and Nokia. That could cost Nokia even more market share.
It looks like Nokia's decision to go with Windows 8, rather than the free open sourced Android operating system, was a huge mistake. Nokia now finds itself at Microsoft's mercy and is vulnerable to any move Microsoft makes to boost its share of the smartphone market. These two moves will probably hurt Nokia's stock value and boost Microsoft's stock value.
Microsoft has shown that it can compete effectively in the smartphone arena. It has not boosted sales yet, but it has put itself in a position to enter new markets and increase its cash flow. Putting Windows 8 on huge numbers of smartphones will greatly increase the reach of its Bing search engine and could boost advertising revenue. This could also open other revenue sources for Microsoft, such as the sale of apps, software, songs, videos, and games directly to consumers.
Another advantage Microsoft has in the smartphone arena is its huge share of the business market. If it could develop and sell a Windows 8 operating system that could operate on tablets, regular PCs, company servers, and smartphones at the same time, it could get itself a huge share of the business market. This could be Microsoft's ultimate goal because the news of the Lumia move comes just as Microsoft is previewing its business-friendly Surface tablet.
The launch of an integrated Microsoft cloud that encompasses Surface and Windows 8 phones could give the company even more cash. That cash flow will push the shares and give Microsoft even more resources to squeeze smaller competitors such as Nokia out.
Nokia's only smart move at this point would be to go with Android. That would be the only way it could preserve market share and protect what's left of its stock value. If Nokia aggressively started designing, manufacturing, and marketing Android phones and tablets, it might have a chance. Such a move would certainly give the company's stock value a boost because that would indicate it is willing to take drastic action to remain competitive.
Only very drastic action will save Nokia at this point. That action would have to be done by Nokia alone and not with Microsoft. Microsoft has proven to be more of a predator than a partner, picking Nokia's bones rather than helping to revive it. The most likely outcome of the Microsoft/Nokia drama will be that Microsoft will simply take Nokia's place in the smartphone market. Its devices will replace Nokia's in various niches of the market. That means Microsoft could actually be poised for growth at this time.
Microsoft could Buy Nokia
There is another possible outcome to the Nokia/Microsoft drama that is getting more and more likely. Microsoft might simply try to buy Nokia now that its stock values have sunk to incredible lows. On June 28, 2012, Nokia was actually trading at $2.11 a share. That sure sounds like a bargain for somebody.
A purchase of Nokia would make a lot of sense for Microsoft, which would get Nokia's patents and design and manufacturing capabilities. It would also get the Nokia brand to market products under and the relationships that Nokia has with telecoms. Those relationships would give Microsoft marketing channels for Windows 8 smartphones and tablets.
We all know that Microsoft has a lot of cash; it just spent $1.2 billion for Yammer Inc. in order to get a few pieces of business software. There's a strong possibility that Microsoft will try to buy Nokia in order to get its portfolio of patents. After all, Nokia has around 30,000 patents, around 11,000 of which have been filed in the United States. Those patents could give Microsoft an edge in its attempt to increase its share of the smartphone market.
The move would be similar to Google's purchase of Motorola in order to get that company's storehouse of patents. Like Google, Microsoft is going to have to protect itself from patent infringement lawsuits as it expands into the hardware arena. Another reason why Microsoft would buy Nokia would be to keep Google from buying it and getting its hands on all those patents.
A Microsoft takeover of Nokia would not necessarily boost Nokia's stock. Instead, it would probably depress stock values because investors and speculators would start dumping Nokia stock in order to take advantage of that scenario. That means the share value could fall even further, perhaps to $1 or lower.
If Microsoft is planning a Nokia buy, it won't move publicly in order to keep Nokia stock prices low. The last thing Microsoft wants is to end up in a bidding war for Nokia with Google. Instead, Microsoft will probably move quietly and try to negotiate a merger or buyout.
Special Relationship will Continue
The relationship between Nokia and Microsoft is likely to continue and grow into a merger because of the close connections between the companies. Nokia's Chief Executive, Stephen Elop, is a former Microsoft executive. He would be in an excellent position to negotiate some sort of deal with Steve Ballmer.
Such a merger or continued joint venture would be a good way to save the Nokia brand. It could also pump some value back into Nokia shares by demonstrating that the company still has some potential left. Another way that Microsoft can help Nokia is to infuse it with the one thing it needs desperately at this time, cash. Nokia is going to need lots of cash if it wants to compete with Samsung in the low-end phone market. Microsoft could be the best source of that cash.
The reason Nokia's share value is so low is easy to see: the company is in an incredibly difficult situation. Its supposed partner has gone to some lengths to undercut it, yet Nokia may need that partner if it is going to have any sort of future left.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.