Microsoft fails to lift Nokia’s market fortunes

WHEN Microsoft Corp. announced on April 25, 2014 that it had completed its acquisition of the Nokia Devices and Services business unit, the market reaction, across the globe, including Nigeria, was ecstatic, with the conviction that the coming of the software giant into Nokia would revive the sudden declining fortunes of the Finland based mobile phone firm.

But, over 14 months after formal take over, Nokia’s fortunes have continued to nose dive and to a larger extent, resulted into loss of market share to its biggest rivals—Samsung and Apple. Critics have said that Microsoft has been slow into the mobile market.

Lately, the likes of Huawei, Lenovo, HTC, and Blackberry, among others, have been posing challenges to Nokia in the market, as they have also been able to convince the buying public of their prowess in the mobile device space.

Indeed, the acquisition journey actually started in 2013, with Microsoft agreeing to buy Nokia’s mobile phone business for 5.4 billion euros ($7.2 billion; £4.6 billion). The deal also saw Nokia licensed its patents and mapping services to Microsoft.

At the twilight of the deal, former Microsoft Chief Executive, Steve Ballmer, described it as “big, bold step forward.” Ballmer said his company was in the process of transforming itself from one that “was known for software and PCs, to a company that focuses on devices and services”.

The purchase was completed in early 2014, when about 32,000 Nokia employees were transfered to Microsoft.

Contrary to expectations of a boom in market share, latest market indicators have shown that Microsoft, one of the biggest names in the technology sector, has struggled as consumers have shunned traditional PCs and laptops in favour of smartphones and tablet PCs.

Critics said the firm has been too slow to respond to the booming market for mobile devices. It launched its Surface tablet PCs last year, but sales of the devices have been relatively slow.

Analysts had argued that the company wanted to make sure that it got its strategy right in the mobile phone market.

“Mobile is an area of tremendous potential but it has been one of weakness for Microsoft”, said Managing Director of Frost and Sullivan, a consulting firm, Manoj Menon, in an interview with the BBC.

According to him, clearly the number one priority for the company is to get its mobile strategy right.

But, the recent write-off of billions of dollars related to its Nokia acquisition by Microsoft has called for concern the future of the union.

The software giant had last week said it was taking an “impairment charge” of $7.6 billion, or nearly the full amount it paid for the Finnish firm’s smartphone business and patents last year.

The announcement slapped the failure sticker on the last major move made by Ballmer, who pushed for the Nokia deal in his final months in office against objections by, among others, Satya Nadella before he was elevated to the chief executive’s chair.

A principal Analyst at J.Gold Associates, Jack Gold, described the whole scenario, “as mistake to begin with”, adding “Microsoft had no business being in the cut-throat, low-margin phone business. Who’s making money in phones besides Apple?”

“Impairment” is a term used to describe the situation when the market value of a business is less than what’s carried on the books. In such scenarios, corporations are required to balance accounts by taking a non-cash charge to the tune of the difference. No cash is transferred, although the write-down will impact Microsoft’s June quarter earnings and its fiscal-year numbers. The money was already spent, Gold pointed out.

Previously, Microsoft had carried $5.5 billion in “goodwill” from the Nokia acquisition, and another $4.5 billion in intangible assets, the bulk of the latter representing the patents it bought from the Finnish firm. Because “goodwill” is the difference between purchase price and actual assets, tangible or otherwise, writing off the entire amount, as Microsoft just did, signals that the company grossly overpaid.

The write-off was Microsoft’s largest ever, exceeding by 23 per cent the $6.2 billion charge it took in 2012 to account for the failure of its 2007 purchase of online marketing and advertising company aQuantive.
“Give Nadella a lot of credit for stepping up here,” said Gold, referring to the CEO’s decision to write down the deal and move on.

Chief Analyst with Jackdaw Research, Jan Dawson, echoed that in an analysis he posted shortly after Microsoft’s announcement.
“The key point is that Microsoft has at this point basically unburdened itself of the value of the acquisition, such that if it does have to wind the business down it likely won’t have to take another significant impairment charge,” Dawson stated.
Along with the write-off, Microsoft announced it would lay off about 7,800 employees, most of them working in its device division, specifically the phone group. Those layoffs, as well as other restructuring charges, will cost the company another $750 million to $850 million, Microsoft said. The layoffs will be in addition to the 18,000 workers Microsoft cut loose last year, the company’s largest-ever reduction.

When the layoffs wrap up, Microsoft will have retained just one out of every five former Nokia employees it inherited, Dawson calculated.

A Nigerian telecoms expert, Kehinde Aluko, who spoke to The Guardian, on the sudden turn of event for Nokia, noted that it was just too early to conclude that the deal has failed.

But, he was however, quick to say that Nokia found itself in such a bad shape because it failed to read the future and innovate.

Aluko said Nokia was a pioneer in the smartphone market, literally introducing consumers to the smartphone with its initial Symbian Series 60 devices in 2002. For the next five years, Symbian phones had little trouble maintaining a leadership position in the smartphone pack. ‪
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“They didn’t make the leap of faith onto Windows Phone until 2011. Now they are suffering from their slow response”, he stressed.
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He recalled that in 2007, Apple introduced its iPhone, stressing that with its full touchscreen and app-based operating system, the iPhone changed the very definition of what a smartphone should be.

“Yet Nokia failed to respond to the iPhone and the shifting consumer demand that came with it. As the years passed, the Symbian platform aged, and that age really showed when compared to iOS and, later, Android. Simultaneously, the smartphone market exploded — more and more consumers opted for pocket-sized mini-computers instead of “feature” phones with tedious WAP browsers”, he stated.

The telecoms expert went on to say that Android platform paid off for Samsung and Windows yet to pay for Nokia. He said only was Samsung speedy, it also bet on multiple platforms, including Android and Windows Phone — and it even had its own homegrown OS, Bada, just in case none of the others worked out. “But in the end, Android paid off. And it paid off handsomely.”

Aluko said Samsung chose Android at the right time, and it benefited from the maturation of that platform. He said because Samsung has been the dominant player in the Android space, they’ve been able to ride the coattails of that platform.”

On the other hand, he said Nokia spent its time focusing on Symbian until the company’s recent partnership with Microsoft. “But Nokia’s flagship Lumia Windows Phones haven’t paid off yet, as evidenced by Nokia’s Q1 earnings.

“It was a good partnership on paper, but it was too late — over two years after the introduction of the iPhone and Android picked up market steam,” he stated.