Microsoft Corporation’s (NASDAQ:MSFT) deal with Nokia Corporation (ADR)(NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V), though reasonable, does not give contribute any considerable strength to Microsoft in the highly competitive smartphone industry, according to a report from MKM Partners by Israel Hernandez.
Additionally, it is not likely to contribute substantially to the revenues of Microsoft as the computing market is drifting away from PC and Windows.
Profitability not guaranteed
Nokia has garnered a minimal 3-4 percentage of smartphone market, which is not going to benefit Microsoft, unless it expands the Windows OS base and clinch the users of android and Apple Inc. (NASDAQ:AAPL) iOS. The report from MKM holds that the deal is desperate, defensive yet rational. However, the profitability of Microsoft is not guaranteed in the smartphone segment through this deal.
Primary reason for the deal
Hernandez believes that the primary reason behind the quick acquisition of Nokia was that the company wanted to gain traction in the smartphone market as soon as possible. Microsoft was expecting that it will be able to capture a major share by moving its PC OEM licensing model to smartphones. However, the company failed to acquire any considerable share, when pitted against the popularity of the Android operating system from Google Inc (NASDAQ:GOOG) and Apple’s iOS in iPhone and iPads.
Instead of making a hasty purchase, Microsoft could have waited for Nokia to decline to a cheaper price. However, Microsoft Corporation (NASDAQ:MSFT) depends upon Nokia for 80 percent of all Windows phone sales to date. After the deal, Microsoft will have a 15 percent share of the 1.8 billion unit overall mobile phone market.
How the deal will help Microsoft
Microsoft is expecting to enhance the rate of growth of Windows smartphones by heading product development and branding/marketing. Microsoft will get traction in some international and emerging markets where Nokia Lumia is already selling impressive numbers. Additionally, Microsoft will acquire important competencies in hardware design/engineering, supply chain and manufacturing, distribution relationships with carriers and a strong IP portfolio.
Microsoft will extract maximum benefit from engineering expertise in smartphones, as well as tablets, which is an important market in the same process. Also, Microsoft will get a chance to realize better per unit economics vs. its licensing mode that help the company to take a higher percentage of the mobile computing total addressable market.
Acquiring Nokia’s Devices and Services business will let Microsoft integrate its branding and marketing efforts and showcase a more unified image of the company.
