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On Friday, many news reports suggested that Amazon.com, Inc. (AMZN) was working on a new smart phone in order to take advantage of a market that is expected to more than double by the end of the decade. The phone is expected to run on Android, and Amazon is expected to buy a number of patents to form its own patent portfolio in order to avoid being subject to a number of lawsuits as part of the patent war that has been going on for a while. I believe that if Amazon wants to build a smartphone, it should definitely acquire Nokia Corporation (NOK) for this purpose.

Currently, Nokia's market value is around $7 billion (minus $4 billion of cash held by the company) and the company has one of the largest patent portfolios and one of the largest distribution networks in the world. In addition, Nokia has excellent relations with more than 100 carriers from all over the world. Furthermore, the company has factories that are ready for production in multiple countries. In order to set up a similar patent portfolio, distribution network and capacity, Amazon would have to spend a far higher amount than $7 billion. Besides all, buying Nokia would take one major competition out of the market, helping the company's sales.

Unlike what many people think, I don't think the smartphone market is saturated. How can a market with nearly 4 billion potential buyers be saturated with only 3-4 major players? There is definitely room for more players in the market as long as these new players can attract the attention of consumers. One problem is that a company that starts to design, produce and market smartphones from the scratch would have to spend so much time and money that the task becomes almost prohibitive.

New market entrants will have to produce phones that are not simply sufficient, but good enough to compete with the existent leaders of the market such as Apple Inc. (AAPL) and Samsung. Very few companies are actually capable of doing that, and Nokia happens to be one of these companies. That's why Microsoft Corporation (MSFT) trusts Nokia with the task of making Windows Phone, an important player in the global smartphone market.

It is reported that Foxconn, also the producer of Apple's iPhone, will be Amazon's partner in this initiative. Foxconn has also produced Amazon's tablets. Amazon will have to purchase a number of patents, mostly related to wireless technology in order to be able to design its new phones. The company probably will not make any profit off these phones, similar to the company's tablets launched earlier.

Amazon's goal will be to distribute digital content such as e-books, movies and music files through these devices in order to make a profit. Unfortunately for Amazon, its tablets did not sell as well as the company had hoped they would and the same risk runs with a possible smartphone designed by Amazon, unless it has a strong brand name similar to Nokia.

The new hire of Amazon, Matt Gordon will be responsible for boosting the company's patent portfolio after he has helped Intellectual Ventures Management, LLC, acquire more than 35,000 patents. Acquiring Nokia would add 30,000 patents to Amazon's portfolio, and the company would be able to not only build its own phones without a problem, but also enjoy receiving license fees and royalties from many companies, including Apple, for many years to come.

Building a smartphone is so complex that it is very difficult to do without someone claiming patent infringement. Amazon could go ahead and shop around, get patents from here and there, but at the end of the day, some company will come up and claim that Amazon doesn't have all sufficient patents to build a smartphone.

If the company acquires a company that already produces smartphones, it would be in a safe spot. This is another reason for Amazon to purchase Nokia. After purchasing Nokia, Amazon could spin-off Nokia's Siemens-Nokia Networks business or sell it to some other company in order to cover some of the costs associated with acquiring the company.

Nokia's current price tag is around $7 billion. Excluding the company's cash holdings, the price tag comes down to $3 billion. If spinning off or selling Siemens-Nokia Networks brings in another $1.5 billion, the company's purchase will cost only $1.5 billion. This money includes Nokia's handset business, its maps, the company's distribution capacity and patents. Considering that the patents bring in royalty and license fees worth of $600 annually and the company would save money on any patent-related lawsuits, acquiring Nokia makes perfect sense for Amazon.

Will Amazon actually acquire Nokia? I doubt it. If Amazon were to make a move to acquire Nokia, Microsoft would act quickly to buy the company, effectively raising the price tag significantly. Demand for Amazon tablets has been weak lately and it is expected to get even weaker as Google and Microsoft launch their own tablets. If Amazon wants to get into the smartphone business, it should act on acquiring Nokia.

As a stockholder of Nokia, Amazon's purchase of Nokia at today's price would not be in my favor as Amazon would end up buying Nokia at the bottom price. A lot of Nokia's shareholders who have bought the stock at prices above $5 would be upset as well. Still, if Nokia is not able to have a turnaround, I would rather it be acquired by another giant than simply become history.

Source: Should Amazon Buy Nokia?