Yesterday, Microsoft (MSFT) wrote off its ill-fated 2007 acquisition of ad agency aQuantive, taking a $6.2 billion non-cash charge. Response from the market? Nothing. Microsoft's stock didn't budge an iota.
That unfortunately, seems like the situation facing Nokia (NOK). Microsoft's mobile oriented-consumer oriented Window 8 will enter the market with a big splash with or without a successful smartphone from Nokia. (Note: In this article, I'm going to refer to Windows Phone 8 together with Windows 8 as simply "Windows 8"). Nokia is Microsoft's partner, but it is far from indispensable: Microsoft still has Samsung's and HTC's support.
Could Microsoft 'write off' Nokia later this year? That is, leaving Nokia to live or die by itself? That would have huge implications to Nokia's share price, because Nokia's survival would depend on Microsoft's support.
I believe that is unlikely. The key reason lies in how important Nokia is for Windows 8.
For Microsoft, Nokia plays a big role in making sure Windows 8 is successful. The role is similar to that of Microsoft's own Surface tablet. Some may argue that Surface could potentially alienate other PC manufacturers such as HP (HPQ), Dell (DELL), or Lenovo. It is not necessarily the case.
Like Surface, Nokia is Microsoft's "private label," to borrow the term from retail business.
In retailing, private labels (such as a CVS branded painkiller) can serve at least two purposes: first, they provide a low-cost alternative for consumers. This is not particularly relevant in the smartphone/tablet context. Second, private labels put pricing and quality pressure on national brands. This is a key part of Microsoft's strategy.
With Nokia and Surface, Microsoft achieves two important goals. First, there will be enough hardware support for Windows 8 in the categories that are the most important for Microsoft's expansion from PC to mobile devices. Second, these two products set the standard for Windows 8 based mobile devices. In order to stay competitive in the market, Samsung and HTC can no longer support Windows 8 half-heartedly, as they did with Windows Phone 7. Their Windows 8 smartphones will have to be good enough to compete with Nokia's. As pure play hardware companies, there is very little incentive for them to give up on Windows 8, but Nokia will ensure their full support. The similar goes with HP, Dell, and Microsoft's own Surface. It will be too dangerous for HP and Dell to stay out of the tablet market. Now they have to provide something capable of competing with at least Surface, and to some extent, Apple's (AAPL) new iPad and Google's (GOOG) Nexus 7.
In this sense, Nokia is Microsoft most important partner in its mobile strategy. Microsoft will not allow Nokia to fail, not within the first year of Windows 8's introduction anyway. It will not 'write off' Nokia.
Without that concern, the investment prospect of Nokia suddenly becomes much brighter. In the short term, Nokia should at least return of above $3 level by the end of 2012. The only thing that prevents me from buying now is I expect Nokia to have another very ugly quarter before Windows 8 comes out. Timing is important in this case.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
