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Microsoft buying Nokia's phone business in a $7.2 billion bid for its mobile future

Microsoft buying Nokia's phone business in a $7.2 billion bid for its mobile future


That's one way to become "a devices and services company"

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Microsoft CEO Steve Ballmer stock 1020
Microsoft CEO Steve Ballmer stock 1020

One of the most enticing "what-ifs" of recent years has come true: Microsoft has purchased Nokia's devices and services unit, bringing the Lumia lineup under the Redmond roof. The move unites Windows Phone 8 with its biggest hardware supporter, giving the company the integrated mobile offering it's been looking for with Surface and other devices. When the deal closes in the first quarter of 2014, Microsoft will pay €3.79 billion for Nokia's business, plus another €1.65 billion to license its portfolio of patents. (The €5.44-billion total is considerably less than Microsoft paid for Skype in 2011.) 32,000 people are expected to transfer from Nokia to Microsoft, including 18,300 that are "directly involved in manufacturing."

The purchase comes on the heels of what appeared to be a failed acquisition in June, at which point it seemed conversations had broken off entirely. Now the two come together, in what outgoing Microsoft CEO Steve Ballmer called "a bold step into the future." In an email, Ballmer cited the Lumia 1020 as an example of what the companies could do together, but said the phone hadn't caused the marketshare bump it deserved. "Now is the time to build on this momentum and accelerate our share and profits in phones," he wrote.

Asha will be an on-ramp to Windows Phone

A driving force behind the sale seems to be Nokia's low-end Asha brand, which Microsoft has acquired outright. Asha gives Microsoft a far larger footprint for Windows Phone, and access to millions of customers in developing countries that it plans to use as an "on-ramp to Windows Phone." The emphasis also lends some credibility to the notion that Nokia's high-end strategy isn't working — analysts predicted a horrific Q3 for the company, and its struggles to find a foothold are well-documented. In fact, Microsoft's licensing deal for the Nokia brand doesn't include future Lumias — Nokia as a smartphone brand is effectively dead, as Microsoft takes the lineup in-house.

Nokia's days as a smartphone brand are over

Though Nokia was by leaps and bounds Microsoft's best hardware partner for Windows Phone 8, EVP of operating systems Terry Myerson was careful to note that Microsoft's purchase doesn't come with nepotism. As Google has with Motorola, Myerson promised every partner would be treated the same, even quoting a song by The Killers to make his point. And from Huawei to HTC, there are still other partners — Nokia's coming in-house, but Windows Phone 8 isn't being walled off.

Its device business now gone, Nokia's plan is to focus on three core technologies: NSN (its network infrastructure) HERE (its maps and location-based services); and Advanced Technologies (a licensing and development arm). Microsoft will pay Nokia for a four-year license of the HERE services, bringing the new company more revenue and stability than it had previously. But it also makes Nokia a much smaller company.

Stephen Elop is going back to Microsoft

As part of the agreement, Nokia CEO and President Stephen Elop is stepping aside; as of today he's Nokia's executive vice president of devices & services reporting to interim CEO Risto Siilasmaa, previously chairman of Nokia's Board of Directors.  When the transaction closes, Stephen Elop will go back to Microsoft and lead an expanded devices team, reporting directly to Steve Ballmer. Julie Larson-Green will report to Elop and continue to run the devices and studios team.

Another notable departure is that of Marko Ahtisaari, Nokia's executive vice president of design. Ahtisaari will be leaving the company in November to "pursue entrepreneurial opportunities," according to a Nokia press release. He was credited with fathering the company's current Lumia design language, which has its roots in the ill-fated N9 smartphone.

For $7.2 billion, Microsoft bought its way into the category of "devices and services company." It gives Microsoft the kind of end-to-end control in mobile that only Apple and BlackBerry have enjoyed (to varying success), and a critical measure of quality control. But can Microsoft succeed where Nokia failed? Was Nokia holding Windows Phone back, or was Windows Phone the problem? The big questions aren't going away, but maybe now we'll get answers.

Correction: This article incorrectly stated that Stephen Elop is now leading Microsoft's devices team. However, Stephen won't join Microsoft until after the acquisition is approved.

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