Microsoft to Buy Nokia's Devices and Service BusinessMicrosoft to Buy Nokia's Devices and Service Business

Windows Phone is a decent OS, and Nokia has always built solid products; however, the same can be said of BlackBerry. Success in the smartphone market takes more than that,

In what can't be described as a "surprise", Microsoft announced that it would be buying Nokia's Devices and Services business for $7 billion in an all-cash deal; roughly a third of that will go to licensing Nokia's patents. Microsoft will be drawing on its overseas cash resources to fund the transaction.

You will recall that in February 2011, Nokia, under the leadership of former Microsoft executive Steven Elop, announced it would phase out its own flagging Symbian operating system and focus all of its efforts on building devices that run Windows Phone. Elop will now return to Microsoft where he will head up a larger devices group reporting to Ballmer.

Elop had cast his company's fate with Microsoft, and I for one was wondering how long the shareholders would put up with continuing losses as the company transitioned to Windows Phone. In the second quarter, Nokia's sales were 5.7 billion Euros ($7.51 billion), down 24% year over year; the company posted a loss of 278 million Euros ($366.26 million).

Microsoft's shares were down about 5% in early trading following announcement of the deal. In August, Microsoft took a $900 million write-off on its inventory of Surface tablets and knocked $150 of the price.

In an email to Microsoft employees, soon-to-retire CEO Steve Ballmer made the interesting claim that "Nokia Windows Phones are the fastest-growing phones in the smartphone market." Probably true, but according to IDC they still represent only 3.7% of the worldwide smartphone market, well behind Android's 79.3% share and Apple's 13.2%.

This acquisition is in line with the reorganization Ballmer announced in July when he said, "Going forward, our strategy will focus on creating a family of devices and services for individuals and businesses that empower people around the globe at home, at work and on the go, for the activities they value most." That reorg created four engineering areas: OS, Apps, Cloud, and Devices.

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Read more of our coverage on Microsoft-Nokia, from Zeus Kerravala and Dave Michels!
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The big question going forward is where smartphones will fit in Microsoft's portfolio, and will they finally be able to break into the market in a meaningful way? Only Apple and BlackBerry have control of both a mobile device and a mobile operating system; you could argue that Samsung does as well with its Bada OS, but it is certainly not a major factor in the market.

With regard to Microsoft, the question is, will the Nokia acquisition impact consumer sales, enterprise sales or both? Microsoft has introduced a line of Lync Mobile clients for iOS, Android, and of course, Windows Phone; BlackBerry makes its own Lync client. However, those mobile clients have had little uptake from users as they are not well integrated with the device's native interface. The Microsoft presentation describing the acquisition made no reference to Lync.

The reality of the smartphone business is that the consumer is king, and the operators as well as the device manufacturers focus the vast majority of their attention on the consumer segment. The InformationWeek survey on Mobile Security in the enterprise found that 68% of respondents currently allow the use of personal devices for work, and another 20% were developing such a policy. Based on that, it would appear that Microsoft must focus on the consumer first, as that's were these devices are being sold.

Windows Phone is a decent OS, and Nokia has always built solid products; however, the same can be said of BlackBerry. Success in the smartphone market takes more than that, and apps are a key part of the equation. The challenge here won't be blocking and tackling--as Zeus alluded to in his post, success here is going to take a Hail Mary.

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