
The Deal That Makes No Sense - monkbent
http://stratechery.com/2013/the-deal-that-makes-no-sense/
======
polemic
> _"...I think Microsoft ought to abandon Windows Phone. The war is over, and
> iOS and Android won."_

That's remarkably short-sighted. The first iPhone was released only 6 years
ago, Android 5 years ago. You really think that Microsoft - a company with
nearly infinite runway, an enormous R&D investment and serious history - is
going to down tools after a few years of frustration? Not likely.

The prize is too big and consumers too fickle to just give up.

~~~
bodyfour
Exactly. Plus it's a prize Microsoft probably feels it can't afford to lose.

If Android magically evaporated tomorrow Google would be just fine -- the core
of their business (ad sales) doesn't fundamentally require that they control
the mobile platform, although it certainly makes things easier.

Microsoft, on the other hand, had for decades been the _platform_ company.
They've historically tried to grow by pushing out from their desktop beachhead
into other territory they think they can control the platform for (i.e.
servers, game consoles)

Now suddenly they've found themselves behind in the highest-growth segments of
the industry. In fact, just "behind" doesn't do their situation justice:
they've had to spend billions just to claw themselves into a distant third
place.

I expect that those billions will keep flowing. Microsoft is desperate to win
this thing.

~~~
bad_user
> _If Android magically evaporated tomorrow Google would be just fine -- the
> core of their business (ad sales) doesn 't fundamentally require that they
> control the mobile platform_

I do not agree. They don't necessarily need to control the mobile platform,
but they do need access to the distribution channels.

Witness how Apple replaced Google Maps with their own solution, even before
their solution was good enough, as if they couldn't wait to get rid of GMaps.
At some point not so long ago, they also threatened to replace Google's search
engine with Bing by default. In 2009 Google Voice was also rejected from
iTunes because it was "duplicating existing functionality".

Google is basically playing Microsoft's own game from the nineties -
controlling the platform makes them a valuable distribution channel, ensuring
not only their survival, but also giving them leverage in expanding to new
markets.

Google is bigger and much more dangerous today because of Android, which IMHO
is vital for them going forward.

~~~
NotAnEngineer
> At some point not so long ago, they also threatened to replace Google's
> search engine with Bing by default.

In iOS 7, Siri (the only search interface Apple cares about) will search Bing
by default. Source: [http://appleinsider.com/articles/13/06/10/a-wiser-siri-
snubs...](http://appleinsider.com/articles/13/06/10/a-wiser-siri-snubs-google-
for-bing-in-apples-upcoming-ios-7)

------
shadowmint
I don't agree with all the things in this article, but there certainly rings a
bell of truth in there somewhere.

A 5.44 billion EURO transaction to acquire a company that is _already_ in a
strategic partnership with you and working exclusively with your platform
doesn't make sense.

My vote also goes for Nokia being financially in trouble, and M$ have their
hand forced by the fear of a collapse in Nokia would gut the distribution
channels for all the flagship windows phone models.

Worse, what if word got out and someone else bought them?

...wait, no, that would mean Microsoft would have some special insider
knowledge of Nokia's finances that no one else was party to. Surely not.

~~~
maaaats
The article is full of errors and unbacked claims.

> ... adding on a mobile phone business that Microsoft probably should abandon
> ...

Why should it be abandoned? Just because the author isn't a fan of WP8?

> have argued that Stephen Elop made a massive strategic error by choosing
> Windows Phone over Android; ... It would have been to Nokia’s benefit to
> have everyone running Android, including themselves.

Not necessarily true. There's only one manufacturer making money on Android at
the moment, Samsung. When Elop got aboard, Nokia was already waaay behind.
It's not like he drove them down, he merely tried saving them. Choosing
Android might have gone better, but probably not. At least it was better going
for WP than sticking to their own, dying systems.

~~~
rmc
_Why should it be abandoned? Just because the author isn 't a fan of WP8?_

The general public aren't a fan of WP8 either.

~~~
iaskwhy
20% of the general public in Poland, Mexico and some Eastern European
countries don't agree with that claim. People forget how varied is the
smartphone market across regions.

~~~
chris_wot
Only 20%? This is not a great argument!

~~~
mkr-hn
As Apple fans are often quick to point out when someone mentions Android's
share, market share is not the only (or best) measure of a platform.

~~~
chris_wot
Except the argument was that the general public aren't fans of Windows phones,
to which 20% market share of a few regions was used as a counter argument.

I would tend to think that market share is one indicator of a phone platform's
popularity, and while 20% is not bad, it's not an amazing figure either.

~~~
mkr-hn
I looked around for a chart of the iPhone's market share by year, but couldn't
find one. I remember the iPhone having trouble in its first year or two, and
most of WP8's credibility comes from the ~2 year old Lumia line.

~~~
chris_wot
True. In 2010 the iPhone only had about 4% market share. My only point is that
I'm talking about popularity of existing devices. It may well be that
Microsoft will turn it around!

~~~
ZeroGravitas
The other way to look at it is that iPhone had ~100% share of the "modern
smartphone" market (choose your own name for it, but Blackberries and Symbian
don't count).

------
redact207
Can I add my own conspiracy theory and put forward that MS wanted to buy Nokia
years ago when the world was going mobile but couldn't. Then one by one, MS
VPs mysteriously left their posts to go work with Nokia. Fast forward to
today, MS finally buys the firm they wanted to in the beginning.

~~~
pessimizer
That was the consensus amongst Nokia fans after the burning platform speech -
that Elop's purpose was to drive down the price of Nokia until it was a cheap
acquisition.

------
beloch
The notion that Nokia was about to jump-ship or simply go under is certainly
plausible. Another possibility is that MS wanted to start using Nokia's
resources for their other hardware projects and it was going to be awkward
slicing off teams from Nokia and having them start working under a MS
department. MS might not be selling as much hardware as Apple, but their XBox
line is the current king of consoles. With a new console-war brewing, MS is
probably desperate for any edge they can get over Sony. Who knows? Nokia might
just have something that can help.

~~~
hannibal5
I think Microsoft sees Smartphones as strategic must have for long term.

MS saw that Nokia is the only player in the Windows market and Samsung is
never going to be big on MS. They just bought the hardware and are making
Windows phones into closed platform like iPhone is.

I don't think that Samsung and others are going to continue making windows
phones after MS bought Nokia.

~~~
tankenmate
The biggest reason that phones are a strategic "must have" is the massive drop
in desktop sales.

~~~
panacea
No. Phones (or watches) as access points to 'your digital life', even if
managed on tablets/laptops/desktops, are the digital wallet in your pocket.

------
JulianMorrison
Microsoft wanted an ecosystem of competing handset makers like Android, where
they could just make the OS and rake in the money; they have realized they
aren't going to get it, and the one handset maker who took the sucker bet was
dying fast. So (I predict) they have decided to switch to the XBox model,
where the hardware is in-house, subsidized, and used to gain market share.

------
devx
I love this guy. He almost always "gets it". If Microsoft was forced into
buying Nokia's phone business, then if I were a WP phone customer, I'd be even
more worried for this division's future, because it means they don't really
have a clue what to do with it in the future, if they only bought it so Nokia
doesn't go bankrupt (they were running out of money).

It also doesn't help that Microsoft has historically had pretty incompetent
management, horrible culture between divisions and inside divisions, and it's
now in the process of reorganizing and getting rid of its CEO (which was also
sudden, and unplanned).

------
JonoW
I'm not sure why so many are predicting WPs death - it's actually doing pretty
well outside the US. Here in the UK it's now just under 10%. Pundits are far
too US orientated.

~~~
tanzam75
> _I 'm not sure why so many are predicting WPs death - it's actually doing
> pretty well outside the US. Here in the UK it's now just under 10%. Pundits
> are far too US orientated._

Trouble is, the US is a large and profitable smartphone market. And it's
locked up by the on-contract subsidy model.

There is a strong relationship between iPhone market share and subsidy amount.
Countries with no subsidies have very few iPhones. Countries with some
subsidies have some iPhones. The United States has high subsidies and thus a
lot of iPhones.

[http://www.tech-thoughts.net/2012/05/proof-of-iphones-
depend...](http://www.tech-thoughts.net/2012/05/proof-of-iphones-dependence-
on-carrier.html)

To some extent, Apple has a protected home market. Regardless of how its
market share declines overseas, Apple will still rake in enormous profits
through the cellphone subsidy in the US.

This is something that Nokia/Windows Phone doesn't have, with its puny 3.5% US
market share. They're doing OK in the markets where people look at the price
of the phone, and not doing well in the one market where people are happy to
have their pockets picked.

That's not a recipe for making large profits in the phone business. And that's
why the US market matters. Profits are disproportionately large compared to
revenues.

~~~
JonoW
Yup it's totally possible that WP will never crack the US, but as the non-US
smartphone market is growing rapidly, I don't think success in the US is the
be all and end all.

------
jeswin
_The tragedy in the deal, as I hinted at earlier, is that I think Microsoft
ought to abandon Windows Phone._

According to the author, MS should abandon the fastest growing class of
computing devices. What kind of a strategy is that?!

Meanwhile, Windows Phone sales are up 77% YoY.

~~~
rmk2
Growing without market-share tells us comparatively little.

And to be the person for once that posts the obligatory xkcd comic:
[http://xkcd.com/1102/](http://xkcd.com/1102/)

~~~
jeswin
On HN, you could give people the benefit of doubt and assume that market-share
growth wouldn't be brought up unless the numbers were large enough. I would
refrain from quoting that figure if it went from say 10,000 units to 20,000.

Last quarter, iPhone sales were 31 million devices and WP8 sales were 7.4
million devices. If WP8 is selling one device for every 4 iPhones, that is
indeed a decent result relative to where they started off from.

------
ChuckMcM
It isn't clear to me why the author is angry here but it comes across that way
:-)

His thesis though, that something forced this move, is pretty credible. And
the choices being (in order of likelyhood)

1) Nokia filing for bankruptcy - this one clocks up as being most likely for
me

2) Someone else was going to buy them - I wondered about this with Apple's
Maps fiasco, they had much better maps than Apple did, although I don't think
Nokia would go for a breakup with partial acquisition.

3) Nokia switching to Android - this one I hear from people who wish it were
true, but haven't seen much from Nokia on it.

Nokia has clearly been hurting for a while. Small flashes of excellence in an
otherwise confused consumer experience. They also showed that you could build
a competitive experience with Microsoft's phone product but it hasn't been
helped by Microsoft's inability to get the developer traction it wanted.

Time will tell if it was able to change the path of Nokia and Microsoft for
the better.

~~~
protomyth
> 2) Someone else was going to buy them - I wondered about this with Apple's
> Maps fiasco, they had much better maps than Apple did, although I don't
> think Nokia would go for a breakup with partial acquisition.

Am I reading the news wrong or is this a partial acquisition? It actually
looks like Microsoft just made it easier for Apple to buy the part of Nokia it
would want (maps).

~~~
ChuckMcM
I don't have inside information here, but from what I know about such things,
breaking it up decreases the overall value sometimes. Sort of a "leave the
desirable asset attached to the junk to ensure it all sells." In the press
release Microsoft did they explicitly call out getting the Maps unit as part
of the deal.

It would also have been a disaster for Microsoft if Google had bought them,
not that I think they were thinking about it.

------
mbesto
The Deal That Makes No Sense - Was Apple Forced Into Buying NeXT?

~~~
MaysonL
Thing is, Apple got a great OS and a great CEO. WTF did MS get that is at all
comparable?

~~~
mbesto
Apple happily shuttled out what they had perceived was a bad CEO, just as we
all sit here in our armchairs preaching the same thing about MS.

MS gets a device manufacturer, which allows them to compete with Samsung and
Apple.

Hindsight is 20/20.

------
anuraj
The deal does makes sense - MS has oodles of cash and several cash cows but no
stars for the future. Other two players, Apple and Google has already brought
production in house - MS has a fighting chance with this acquisition - though
the larger issue of MS bureaucracy can rock this boat as well

------
kennethh
Elop must have the record in destroying a company. In 5 years a company went
from being market leader with something like 90% of the smartphone market to
almost bankrupt. I do not think something like this have ever happened this
fast.

~~~
300bps
Yeah the completely market revolutionizing iPhone taking all of the high end
market and Android taking all the low to high end market had nothing to do
with Nokia's downfall.

~~~
pessimizer
And the announcement that they were abandoning Symbian when all of the phones
they were selling were Symbian didn't have anything to do with that?

You don't announce that you're abandoning your current platform when you
haven't developed your replacement platform yet unless you're a moron or
intentionally sabotaging your company.

------
chollida1
> "...I think Microsoft ought to abandon Windows Phone. The war is over, and
> iOS and Android won."

Wow, its times like this when its appropriate to trot out Michael Dell's
famous apple quote.

> When asked what he'd do with Apple if he were in Jobs' shoes, Dell said:

>> What would I do? I'd shut it down and give the money back to the
shareholders.

------
Yuioup
No way they weren't forced. This was planned all along.

(Disclaimer: I didn't read the article. I just disagree with the headline).

~~~
objclxt
To be honest, I doubt it was how Microsoft _planned_ it turning out. It
certainly wasn't Plan A.

Microsoft had already made a significant cash injection into Nokia. Plan A
would have been for the Lumia handsets to be a massive success, and for
Windows Phone to gain significant traction.

Although you could argue there has been some progress towards this, it hasn't
been fast enough for either Microsoft or Nokia. Nokia's current strategy with
Windows Phone simply isn't working. They're at a point where they either a)
change the business plan, or b) find another source of cash to pay the bills.

Since 'changing the business plan' in this case would have been _hugely_
detrimental to Microsoft the acquisition was inevitable, but far from ideal
for both parties.

------
lazyjones
Microsoft is probably aiming to become a patent troll in the long run due to
their lack of innovation. They already have many patents they can extort
future innovators with, so picking up Nokia's (reported to be worth $6b) makes
sense.

~~~
jhonkola
They didn't buy Nokia's patents. They bought Devices & Services business unit
(the one making the phones) and a 10-year (non-exclusive) licence to Nokia's
patents, which obviously are needed to make the phones. Does not sound like a
patent troll move on part of Microsoft.

------
lotsofcows
Elop's job was to drive to the price. Microsoft wanted, and now has, the IP.

------
tsycho
AppleOutsider has a better-articulated article with a similar viewpoint.

[http://www.appleoutsider.com/2013/09/02/nokia2/](http://www.appleoutsider.com/2013/09/02/nokia2/)

------
tzury
People are giving advises all over the web, as if, getting to a point where
you have $7B to spend is not a result of a series of wise decisions and solid
strategy.

I am not a Microsoft fan to say the least, but boy, we understand that this is
all your personal opinion, etc.

However, have you ever touched or got near by a pile of a billion dollars,
that you allow yourself to make such strong opinion about? Did you ever have
1% of that money, or .1% of that money?

Everyone has the right to have an opinion, but please, assume "they" know
facts and figures you don't.

------
ThomPete
they didnt buy Nokia, they bought part of Nokia no?

------
rgeyzer
This guarantees that Nokia phones will continue to run Windows and that
Microsoft can stay in the fight. This could be a life and death fight for
Microsoft as both Google's and Apple's ecosystems are extending to phones,
tablets, set-top boxes and beyond. They haven't built a bad Phone OS, but they
need more time and a full-court press to fight for some market share. This
deal gives them that opportunity.

------
randallsquared
Just a few days ago there was talk around here about Elop being in the short
list for Microsoft CEO. Does this make that more or less likely?

------
xutopia
The deal totally makes sense from my perspective. I wouldn't be surprised if
they try really hard to buy BlackBerry for cheap as well when they falter low
enough to be worth it for them.

------
geophile
Speaking through my hat here, having read nothing about the deal. But is this
the hiring of the new CEO? Sort of like Apple buying NeXT to bring back Jobs?

------
JimmaDaRustla
Here we go. Weeeeeeeeeeeeeeeeeeeee...

------
kamakazizuru
who is this guy.. why does his overly entitles opinion on this matter?

------
corresation
Nokia's most recent quarterly had them sitting on $4 billion EUR of cash ($5.2
billion), with barely any burn. I don't think the company was poised to go
bankrupt anytime soon.

Either Microsoft is completing a long planned purchase, or Nokia threatened to
dabble in Android. Other than that the purchase is irrational.

~~~
tanzam75
That was at the end of June.

In August, they spent about €2.2 billion buying out Siemens' stake in Nokia
Siemens Networks. This could very well have caused some short-term cash flow
issues. Which also explains Microsoft's offer to finance Nokia at extremely
low interest bonds.

Long-term, NSN is generating positive cash flow and ought to be able to pay
for itself.

