The meteoric rise of Nokia Corporation (ADR) (NYSE:NOK) in the years leading up to catastrophic bursting of the tech bubble was breathtaking. The company’s shares went from trading in the $2-$3 range to scraping $60. Nokia Corporation (ADR) (NYSE:NOK) practically overnight became a corporate superpower, sporting a market cap of $250 billion at its peak in 2000. Nokia Corporation (ADR) (NYSE:NOK) was thriving in 2000, when according to the research group Gartner Dataquest, Nokia Corporation (ADR) (NYSE:NOK) held a leading 30.6% market share of the mobile phone market, which was 17.3 percentage points more than the second-place Motorola held .
Even as Nokia Corporation (ADR) (NYSE:NOK) dealt with the severe backlash of the bursting of the infamous tech bubble in 2000 and 2001, its core business remained strong. As late as 2007 the company held a dominant position in mobile device industry, with a 40% share in the handset market.
The bigger they are the harder they fall
In 2007, Nokia Corporation (ADR) (NYSE:NOK) still held onto a valuation over $150 billion. Then the empire began to collapse. The dramatic rise of Nokia was almost as shocking as its fall . Along with the rest of the market, Nokia’s stock fell in 2008, however unlike the broader market, never recovered. Over the following years the company’s market share withered away, while its stock price plummeted. Now in 2013 Nokia shares trade at roughly $5, and carry a valuation of a meagerly $19 billion.
The fat lady starts to sing
On Sep. 3, Nokia agreed to sell its main handset business to Microsoft Corporation (NASDAQ:MSFT) for $7.2 billion. The seeds of this deal were planted two years ago, when Nokia made the controversial decision to use Microsoft Corporation (NASDAQ:MSFT)’s Windows Phone software for smartphones, opposed to Nokia’s own software or Google Inc (NASDAQ:GOOG)‘s Android operating system.
This deal, which includes an agreement to license Nokia’s patent portfolio for 10 years, will bring 32,000 of Nokia’s 90,000 employees to Microsoft, and leaves Nokia with its networking equipment unit, navigation business, and technology patents.
Microsoft pushes into mobile
Why did Microsoft Corporation (NASDAQ:MSFT) acquire this troubled business? Many see this as a continued attempt by the company to push further into the fast-growing mobile industry. While Microsoft’s own Surface tablet has sold sluggishly since its launch last year, Nokia’s Lumia series have helped in boosting Windows Phone’s market share in the global smartphone industry to 3.3%, surpassing BlackBerry Ltd (NASDAQ:BBRY) for the first time this year.
Under the past deal between Nokia and Microsoft, Microsoft got less than $10 per phone in software royalties. Now, since Microsoft owns the software side of the product as well as the hardware side, Microsoft stands to make roughly $40 per phone sold.
The strategy of controlling both the hardware and software sides of the product has successfully been employed in the past by Apple Inc. (NASDAQ:AAPL). Combined with Google Inc (NASDAQ:GOOG)’s Android platform, Apple’s iOS system control 90% of the global smartphone market, posing stiff competition for Microsoft’s Windows platform.
What this means for your money
For Nokia investors, this marks the end of a long-standing era. Going forward, Nokia will no longer be a global superpower in the mobile industry. While its hardware segment may be revived by Microsoft, investors in Nokia will not benefit, and are left with a relatively small and insignificant networking and navigation company. Juha Varis, Danske Capital’s senior portfolio manager, put it simply, “So this is the outcome: The whole business for 5 billion euros.”
For Microsoft investors, this deal quadruples the company’s exposure to the Window’s Phone segment, making Microsoft’s intent to develop as a mobile-centric company even clearer. As a result of this deal, Nokia’s CEO, Stephen Elop, is rumored to be a top candidate as a replacement for the outgoing Steve Ballmer.
Will Microsoft gain a strong hold on the global smartphone industry? Your guess is as good as mine, but one thing I am fairly sure of is that the continued efforts of Microsoft to sprout into the mobile industry will eventually yield results.
How about the effect on Apple Inc. (NASDAQ:AAPL), Google Inc (NASDAQ:GOOG), and BlackBerry Ltd (NASDAQ:BBRY)? Since Window’s Phone platform is likely to remain a very distant third to Apple Inc. (NASDAQ:AAPL)’s iOS and Google’s Android, these two companies are unlikely to be majorly affected. For BlackBerry Ltd (NASDAQ:BBRY), the story is the much of the same. Nothing about this deal is likely to drastically affect current conditions for BlackBerry. In the end, the Nokia Lumia product will still be the same, and consumers are not likely to feel any differently about it than they did a month ago.
The article The Nokia Era Comes to an End, and What This Means for Your Money originally appeared on Fool.com and is written by Ryan Guenette.
Ryan Guenette owns shares of Apple. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
