Looking Further at Microsoft’s Announced Acquisition of Nokia’s Handset Business

We’ve recently commented (via several posts to this blog) on some changes at Microsoft®. The first of our posts included notes on Steve Ballmer’s July “One Microsoft” reorganization announcement. Most recently, we noted our thoughts on Mr. Ballmer’s announcement of his planned retirement from the position of CEO of the company, to occur sometime during the next 12 months. What’s consistent about our comments is our position about just what’s important about the product mix driving revenue at Microsoft. We think it’s all about Microsoft’s enormous customer base across large organizations in the public, private and not for profit sectors, and not much about the consumer product lines the company manufactures.

So we were surprised to read about Microsoft’s intention to purchase Nokia’s handset business. This move, on paper doesn’t seem to have much to do with what we take to be the core revenue driver for this business — enterprise software sales. We aren’t alone in our viewpoint. On September 7, 2013, Barrons published an article on a related topic, It’s the Shareholders, Stupid, written by Andrew Bary. Mr. Bary quotes Rick Sherlund, from Nomura Securities, arguably the leading industry analyst on Microsoft, on the subject of this latest announcement: “‘Investors have wanted Microsoft to reduce its exposure to a declining consumer space and focus on its stronger enterprise business and pay out more cash in the form of share repurchase and dividends. Management succession was thought to help in this regard, but the Nokia deal doubles down on the cost structure for the consumer business and makes it more difficult to reduce costs[.]'” (quoted from Mr. Bary’s article. We’ve provided a link to the complete article earlier in this paragraph).

Leaving aside Mr. Sherlund’s observations on the impact of the additional overhead costs Microsoft will have to shoulder once the acquisition has completed, his remarks about investor notions of where Microsoft should be looking to repair and expand its business are entirely consistent with our ideas on the same topic. So how can the acquisition of Nokia’s handset business be seen as contributing to the success of Microsoft’s efforts to repair its core enterprise software business?

We think this move is understandable when one considers the comparatively diminutive positive impact on earnings from cloud products. If enterprise markets are truly moving away, in droves, from on premises computing solutions, then Microsoft is clearly at the start of a long road of shrinking revenue contributions from its Office products, if not its operating system profits, as well.

Smartphones are pricey devices with an average cost, here in the United States of approximately $500.00 each, if not higher. So buying an admitted laggard in the market, which, nevertheless, was once the biggest manufacturer of mobile phone handsets in the world, can be seen as a means of shoring up the bottom line with a nice chunk of hardware revenue, to copy a page from Apple’s playbook. As well, enterprise business is looking like a market in need of a replacement for the ubiquitous “Blackberry”. The Windows Phone O/S on the Nokia Lumia handset, is, we think, a very good option enterprises will have to consider.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2013 All Rights Reserved

Leave a Reply

Your email address will not be published. Required fields are marked *