Microsoft’s press conference to explain the rationale behind its surprise Nokia acquisition is still hours away, but thanks to the slide deck posted on its investor site, we’re getting an early look at the thinking behind the deal. Long story short, Microsoft thinks it can save money and grow its platform faster by bringing its top hardware partner in-house, and it can finance the deal with overseas cash, limiting the deal’s impact on dividend-hungry shareholders. But the goal isn’t just to save money and get more devices in people’s hands — Microsoft is aiming to more than triple its current smartphone market share by 2018, from just over four percent today to 15 percent within five years.
Redmond sees mapping and geospatial services as core to its strategy
As we reported earlier, Microsoft is paying €3.79 billion for Nokia’s devices and services business plus another €1.65 billion for its portfolio of patents. That entitles Microsoft to use Nokia’s inventions in all of its products going forward, and gives it rights to use Nokia’s HERE mapping technology, for which it will still pay annual fees. Redmond sees mapping and geospatial services as core to its strategy going forward, saying that that there needs to be "an effective alternative to Google" and "more than one ‘digital map of the world.’" It also believes that Nokia’s patent portfolio is extremely valuable — one of the "top two" in wireless technologies — and that the licenses Nokia has in place will give it a valuable income stream going forward. And while Microsoft’s license on Nokia’s utility patents "only" lasts for 10 years, the company will have the option to make it permanent.
The company’s ultimate goal is growth for the platform. After years trying to regain relevance in the mobile industry, Microsoft’s Windows Phone operating system narrowly nudged ahead of theird-place BlackBerry in global smartphone shipments, now sitting somewhere in the neighborhood of five percent globally. Microsoft has said that despite the Nokia acquisition it’s still committed to its other manufacturing partners, but the company thinks the best way to move the platform ahead is to shoot for a big marketshare target by producing great Nokia products. Microsoft believes that once it gets a bigger foothold in the market, opportunities should be better for the partners that stick it out.
Under its current arrangement with Nokia Microsoft is making less than $10 per device
So how much does Microsoft stand to make from the deal? The company thinks it can save $600 million annually within the first 18 months after the deal closes thanks to cost synergies. The slide deck reveals that under its current arrangement with Nokia Microsoft is making less than $10 per device, that stands to grow to over $40 per unit once it brings production in-house.
And while the devices and services business is among the least profitable parts of Nokia, Microsoft thinks it can break even once sales of phones and tablets crack 50 million units. Last quarter, Nokia sold around 7.5 million Lumia devices, making the target a lot more realistic than Microsoft’s stated 15 percent goal for the global smartphone market. Global Lumia shipments have been growing at about 40 percent per quarter over the past two and a half years, and the company is now branching out into tablets alongside Microsoft’s own Surface lineup. It's also worth noting that the deal gives Microsoft the rights to Nokia’s design patents and handset brands, including Lumia and Asha. And it gives Microsoft a ten-year license to use the Nokia brand on feature phones.
Microsoft now has complete control over its mobile hardware and software, access to a ballooning patent portfolio, and some lofty goals. And with Nokia CEO Stephen Elop joining Microsoft as head of its newly integrated devices team, and longtime Microsoft CEO Steve Ballmer stepping down within the year, the pump is certainly primed for someone to make some big moves.