In one fell swoop today, Microsoft is becoming an extremely different type of company. Microsoft is pushing hard to recreate itself as a “devices and services” company and today it took a very big step in that direction by buying, you guessed it, Nokia’s mobile devices and services division.
Microsoft is paying $7.17 billion to bring Nokia into the fold, including the design, manufacturing and distribution of both smart and feature phones and the right to license many of Nokia’s patents, as well as the Nokia name and a host of mobile services.
What didn’t Microsoft buy with its $7 billion in cash? Nokia itself, including most of Nokia’s non-smartphone related property (cellular infrastructure and HERE Maps, for example). Many people will say, “Microsoft bought Nokia.” This is true because Microsoft did buy a good portion of the Finland manufacturing company, but Nokia itself will still exist independent of Microsoft.
So, what exactly is Microsoft getting? Let’s break it down.
What Microsoft Actually Bought
Officially, Microsoft is buying Nokia’s “Devices and Services” business unit. That simple designation is the whole hog: everything from manufacturing and distribution, design, operations, sales and marketing teams and related support. That business unit comprises of approximately 32,000 people that will become Microsoft employees when the deal officially closes.
More specifically, Microsoft is buying Nokia’s Smart Devices unit. This includes the Lumia brand of smartphones running the Windows Phone operating system. Nokia shipped 7.4 million Lumia smartphones in the second quarter of 2013. The Smart Devices unit includes the manufacturing and design of the Lumia line along with the distribution, sales and marketing teams.
Microsoft didn’t just buy the Lumia brand, it bought the people that actually put it together. This is extremely important for Microsoft because it could not possibly think to create its own manufacturing processes and supply chain on its own and hope to make a significant dent as a “devices” company any time soon. In this case, the processes that Microsoft is getting from Nokia are as important as the resources (the sales and revenue of Nokia phones).
Nokia’s Mobile Phones business unit is also part of the deal. This is Nokia’s still robust (but shrinking) feature phone business and includes Nokia’s Asha line of cellphones. Nokia’s feature phone business sold 53.7 million units in the second quarter, second to Samsung worldwide.
Microsoft could have done without the feature phones business unit of Nokia. Yet, to buy the manufacturing processes of Nokia, it had to take the feature phone and Asha units along with the smart devices unit. Microsoft sees the feature phone unit as a way to expand Microsoft services to millions of Nokia users worldwide as a way to “on-ramp” users to Windows Phones. Microsoft will be able to use Nokia’s brand on feature phones for 10 years.
The acquisition is also a bit of a talent acquisition for Microsoft, as it is bringing in most of Nokia’s executive leadership team, including Nokia CEO Stephen Elop who will transfer to being Microsoft’s head of its Devices unit. Elop is still considered a candidate for the CEO role of Microsoft.
In addition to Elop, Microsoft is will bring in Jo Harlow to continue leading Nokia’s Smart Devices team, Juha Putkiranta to lead the Nokia integration into Microsoft, Timo Toikkanenen to lead the feature phone Mobile Phone division and Stefan Pannebecker to lead the device Design team. Chris Weber, Nokia’s marketing head and former head of all of Nokia’s U.S. sales, will come to Microsoft and continue his role as Nokia sales chief.
Microsoft also bought the rights to license Nokia’s robust patent portfolio for 10 years. Microsoft is specifically buying 8,500 of Nokia's design patents, and will also make its patents available to Nokia for its HERE Maps unit. Nokia will also transfer its patent licensing agreements, including its big one with chipmaker Qualcomm, to Microsoft. Other patent agreements transferred to Microsoft includes those with IBM, Motorola Mobility (owned by Google), Motorola Solutions. Nokia also passes on patent agreements with Apple, LG, Nortel and Kodak to Microsoft.
What Microsoft Didn’t Buy
Nokia will continue to be a company outside of Microsoft and will retain rights to its brand and management thereof. If Microsoft were to buy all of Nokia, the acquisition cost would have been more than double what Microsoft paid for the devices side of the business and included many aspects of which Microsoft would wants no part. Eventually, Microsoft would eventually have to sell off those unwanted Nokia parts piecemeal. In this—better—arrangement, Microsoft will be able to license the Nokia brand for existing devices.
The HERE Maps team will stay with Nokia. HERE Maps is a subsidiary of Nokia that employs about 6,000 people. Nokia will make HERE Maps available to Windows Phones and feature phones as part of a four-year license that Microsoft will pay for separately. This preserves a revenue stream for Nokia and also allows Nokia to sell HERE Maps and services to other companies.
Microsoft didn’t acquire Nokia’s entire patent portfolio, either. It bought the design patents outright but will license Nokia’s 30,000 utility patents patents for 10 years.
By not acquiring the entirety of Nokia’s patents, Microsoft was able to keep the acquisition cost of the Devices and Services down while preserving future assets for Nokia.