When you think of smartphones, Apple Inc. (NASDAQ:AAPL) and Samsung are the first two names that come to mind, but Microsoft Corporation (NASDAQ:MSFT) has made another attempt to become a major player in the smartphone market by acquiring Nokia Corporation (ADR) (NYSE:NOK)’s handset business and patents for $7.2 billion. Microsoft investors’ initial reaction to this acquisition has been negative, causing the company’s market value to drop over $15 billion. But, with the rising importance of mobile products, Microsoft’s acquisition might not be as bad as its investors’ initial reaction.
Why?
Over the past two years, Nokia Corporation (ADR) (NYSE:NOK)’s hardware supported the Windows mobile platform, a match that has been disappointing for both companies. Nokia is drowning in the Apple Inc. (NASDAQ:AAPL) and Samsung ocean, with a current smartphone market share of only 3%. The company recently had a quarterly revenue decline of 24.50% year-over-year, which led to a net loss of $1.64 billion. The company’s mobile phone volume experienced a 4% decrease in the last quarter, which led to a 12% decrease in net sales for the division. Nokia’s phone business is clearly in need of rescuing.
Nokia Corporation (ADR) (NYSE:NOK) is Microsoft Corporation (NASDAQ:MSFT)’s main partner in the mobile battle, and with its new purchase the company will be able to control both software and hardware aspects of its phone business. According to Microsoft CEO, Steve Ballmer, the acquisition is about accelerating Microsoft’s share position, improving the company’s agility in innovation, and creating a clear position for one brand. The acquisition will act as a springboard for Microsoft, as the company now controls every aspect of its phones for the first time.
According to a study done by professors Gerard Tellis and Abhishek Borah, when companies attempt to buy innovation, they tend to experience negative returns. This is in contrast to companies that innovate internally or ally with another company to innovate, which tends to result in positive returns. Microsoft Corporation (NASDAQ:MSFT) has experienced the negative effects of acquiring innovation when it bought Skype for $8.5 billion in 2011. Skype was an easy-to-use, “freemium” program that allowed users to call each other. Microsoft changed that by adding in-call ads, much to the dismay of users. The once-unique program now faces competition, like Google Hangouts, while Microsoft continues to integrate it into other products. Microsoft is not finished with Skype, but the performance so far has been less than stellar. While this is certainly not a prediction of failure, it adds another layer of doubt for the company’s mobile branch.
Elopsided
In addition to receiving Nokia Corporation (ADR) (NYSE:NOK)’s handset business, Microsoft Corporation (NASDAQ:MSFT) is getting Stephen Elop. Elop ran Microsoft’s business division before becoming CEO of Nokia three painful years ago. He is returning to Microsoft as a potential replacement for Ballmer, who has announced that he will be stepping down within a year.
At Nokia Corporation (ADR) (NYSE:NOK), Elop tried to keep the sinking ship afloat by making several cuts. He cut tens of thousands of jobs, downsized the research and development department, and closed Nokia’s last remaining handset factory in Finland. None of these efforts brought the company back to prosperity, but instead helped give Elop the nickname E-flop.
Under Elop’s direction, Nokia exclusively used Microsoft Corporation (NASDAQ:MSFT)’s mobile platform for its handsets before being acquired. Because of this, and his previous history with the company, Elop is already favored by Microsoft. Elop has not been named as Ballmer’s replacement, but he has moved from being an external candidate to an internal one.
At the top
While Microsoft tries to figure out a way to improve its mobile business, Apple Inc. (NASDAQ:AAPL) and Samsung continue to battle for the top spot.
