Nokia Suits Microsoft’s Hardware Ambitions

The announcement by Microsoft that the company would buy Nokia’s cell phone division made plenty of headlines, but surprised almost no one. Such a move had been speculated about for months, and Nokia has been struggling for years.

In fact, it seems clear that if Microsoft really wanted Nokia to keep making Windows phones, it would need a financial boost of some kind. But that could have happened just with a capital investment by Microsoft. So why buy a big part of the company?

What is the deal?

The fact is that Nokia fits in nicely with Microsoft’s stated strategy of becoming a devices company in addition to a software company. In one sense, Microsoft has been a hardware company for decades with its Xbox game consoles, its mice, keyboards and Webcams. But these are not the core of a real contender in mobile hardware.

That changed when Microsoft introduced the Surface tablet, a device that garnered broad acclaim for its well-designed hardware even while critics were blasting it for the Windows 8 user interface. While the Surface RT version hasn’t sold well, apparently the Surface Pro, with its full version of Windows 8, is holding its own in the tablet market.

But Microsoft wants to do more than hold its own. The company must have more than a toehold in the smartphone and tablet market to keep from getting pushed out altogether. It needs its tablets to become hot sellers so its mobile operating systems will be widely accepted by users. Microsoft gets a better chance to do this by controlling Nokia’s hardware business and having access to its patents.#

Nokia’s brains…

Nokia brings more than hardware to Microsoft, and perhaps it’s the expertise in mobile devices that Microsoft needs the most. This expertise includes about 32,000 employees steeped in mobile phones and in mobile technology along with intellectual property that’s hard to understate, including access to some of the most basic patents in the mobile industry.

Microsoft CEO Steve Ballmer outlined just how this infusion of expertise will work out in a memo to Microsoft employees released when the two companies announced the deal. In brief, Nokia CEO Stephen Elop will step down and take a temporary position until the deal is finalised, at which point he will lead an expanded devices team. Meanwhile several leading engineering executives will move to Microsoft along with their teams.

Equally important, Microsoft will license Nokia’s Here (formerly Navteq) navigation services for use in its devices and it will gain access to Nokia’s mobile device IP.
Microsoft is not actually buying Nokia’s patents and IP, which are already broadly licensed.

.. plus Microsoft’s money…

Microsoft is clear in its view of why this is happening at this point in time in a slide show published in conjunction with the announcement. Basically, the acquisition of Nokia’s phone business allows Microsoft to pour money into Nokia as a way to help build market share.

This money will go to mobile applications, among other things. While about 160,000 Windows Phone apps are available, this is far behind the number of apps available to Apple and Android users. Microsoft knows as well as anyone that a broad selection of critical apps is a major factor in selling phones.

But there’s one strategic reason that Microsoft is taking this step that’s not specifically mentioned in any of the announcements. If Microsoft is going to become a devices company, it needs senior executives that really understand mobile devices and have a track record to prove it. This is where Elop comes in.

… plus Stephen Elop?

Stephen Elop is a former Microsoft executive who ran the Microsoft Office team before he went to Nokia to take over the company. It’s Elop who caused Nokia to drop its old operating system software and move to Windows Phone, and it’s Elop who played a significant role in developing what is generally regarded as extremely well-designed hardware. While any number of people may find fault with Windows Phone (mostly because it’s not from Apple or Google), few have found fault with the phone hardware.

While Nokia business continued to struggle in the mobile phone market under Elop, the company was already in dire straits when Elop arrived. There’s a general consensus among business analysts that Elop did a lot to keep Nokia afloat.

Right now Elop is slated to become an executive vice president of Microsoft once the deal takes place, but it’s hard to see him remaining in that position. While it’s not clear that Stephen Elop will take over from Steve Ballmer as the next Microsoft CEO, it’s a near certainty that he will have an expanded leadership role at Microsoft.

If Microsoft plans to become the devices and hardware company that Steve Ballmer says it will, then it needs someone like Stephen Elop at or near the top. By buying Nokia’s mobile devices division and the people who go with it, Microsoft is accomplishing exactly that.

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Originally published on eWeek.