The acquisition of Nokia by Microsoft was a disaster in the making with obvious warning signs before the deal was signed.
The acquisition of Nokia by Microsoft might well go down as one of the biggest financial blunders in the company’s history. Greater even than its Xbox 360 manufacturing disaster. Microsoft was in full panic mode when it was caught off guard by the iPhone and the rapid expansion of Google into the mobile market. Gobbling away Window’s mobile market share at an unprecedented rate. Microsoft several billions and retreating from the mobile market for years to come.
Microsoft acquires Nokia
In September 2013, Microsoft announced it would acquire Nokia’s devices and service business, including its patent and mapping service. Microsoft would acquire the cellular company’s devices division for €3.79 billion, and €1.65 billion for its patents, bridging the total acquisition price to €5.44 billion. The transaction was set to be completed in the first quarter of 2014.
In the statement, Microsoft chief executive officer, Steve Ballmer, said the acquisition was a bold step for the company. The acquisition of Nokia would accelerate the market share of Microsoft in the mobile space and bring new opportunities for the Microsoft product line. Adding that the team at Nokia would bring valuable know-how to the company, from engineering, manufacturing to marketing and distribution.
Ballmer explained to CNN would allow Microsoft to compete with big established players, making the organization more agile to operate in this rapidly evolving mobile landscape. He added one body would be more suited to take the charge. Analyst at Gartner, Carolina Milanesi, explained to Reuters that Microsoft couldn’t just walk out of the smartphone market. It needed the reputation and hardware capabilities of Nokia to attract and keep vendors on board for the Windows Mobile operating system, which saw rapid market share decline.
Paul Sawers at The Next Web argued that it wasn’t the lack of apps that were holding back the Windows Phone. Microsoft was working hard to accelerate its app offering to build a viable contender against Google and Apple. From a hardware perspective, Sawers noted that the devices themselves had much to offer. But Microsoft lacked the apps that would bring their smartphones to live.
These devices were packed with popular apps like WhatsApp, Spotify, Netflix, LinkedIn and many more popular apps and utilities such as built-in calculators and the likes. More than enough for the average smartphone user. At the time, app developers were trying to capture as many potential customers as they could, with the market not being fully formed in the duopoly it has become today. This goes against Sawes’ observations that developers pay little attention to the Windows operating system.
The real challenge for Microsoft, Sawes argued, would be simplifying the Nokia device portfolio, which had become a fragmented landscape with devices targeting almost every niche imaginable. Microsoft should focus on trimming the line-up, building devices with strong native apps and not the quantity. Consumers weren’t looking for tonnes of apps to fiddle around with, the native apps were the decisive factor when selecting a new smartphone. But the starting position for Microsoft was fragile to begin with.
Google and Apple disrupt
Microsoft already had a modest market share, but just like Blackberry, it was caught off guard by the iPhone and Google’s Android operating system. In the first quarter of 2009, Windows Phone had a global market share of 2.3 percent. Android was yet to take off, with a market share of 1.69 percent. Apple meanwhile was dominating the space, with a mobile operating system market share of 37.45 percent.
Android would make great leaps in the years leading up to the acquisition of Nokia by Microsoft. In the first quarter of 2010, Android’s market share had increased to 5.43 percent, with Windows Phone slider under 1 percent to 0.84 percent. Microsoft was feeling the strong presence of Apple’s superior hardware and Google aggressive push into the mobile market.
Fast forward to the first quarter of 2013, Microsoft was able to recover some of its lost market share, climbing to 1.15 percent. This in part was made possible by the rapid fall of Blackberry, who saw its market share fall from 18.49 percent in the last quarter of 2010, to an eye watering 3.33 percent. A shadow of its former self. Android meanwhile had grown exponentially, with the operating system now claiming 37 percent of the market. Microsoft needed to act fast, otherwise seeing itself pushed out of the market like Blackberry did before it.
The acquisition of Nokia by Microsoft experienced issues from the start, with Bloomberg releasing a special report about Ballmer’s hard internal sale of Nokia. The board was reluctant as Microsoft was reluctant to allocate such vast resources for a complex merger. Ballmer was able to persuade the board by hinting that the platform could be opened to support Google Android operating system.
Saving Nokia
Quickly into the merger, Microsoft knew it had made a wrong bet and had to readjust course. In July 2014, Microsoft announced its largest ever workforce reduction to date. The software company would cut 18,000 jobs, with the majority occurring at Nokia, which would see its workforce shrink from 25,000 to 12,500, half of the entire company. In a letter to employees, cited by PCWorld, Head of Microsoft Devices and former CEO of Nokia, explained the workforce reduction was necessary to reorganize the phone division within Microsoft.
Founder and principal analyst at Moor Insights & Strategy, Patrick Moorhead, told PCWorld that the workforce reduction was significant, but when put in context, the lay-offs are reasonable. Microsoft and Nokia had significant overlap, primarily in its hardware division. Hence, even through this significant reduction, operations at Microsoft wouldn’t be impacted.
A year after Microsoft began laying off staff at Nokia, Microsoft admitted in an internal email that the acquisition of Nokia has not played out as anticipated. The company would be forced to invest another $750 million to $850 million to restructure its mobile division. The investments were deemed necessary to transform the mobile unit from a standalone entity to a business segment that would fit within the Windows ecosystem. In May 2016, Microsoft announced it would lay off 1,850 jobs in its smartphone business unit.
The software company would write off $950 million on the Nokia business division. Nadella’s decision to trim its devices business unit was a strong departure from former Microsoft CEO Steve Ballmer’s ambitions to turn Microsoft into a device focussed company. Nadella has been aggressively cutting jobs across the entire organization. Despite the severe cuts in its mobile division, Microsoft would remain committed to further develop the Windows 10 mobile platform.
Strategic realignment
The strategic decisions made by Nadella won’t come as a surprise for those who had been following him since his appointment in February 2014. Microsoft had to drastically realign within the new reality it had found itself in. Bloomberg observed that the company had become a Windows behemoth, heavily relying on its operating system and Office-products for its growth. This foundation came on loose footing with Google and Apple devices which brought productivity solutions to the masses.
Nadella knew Microsoft could no longer operate for much longer under its current business model. Drastic decisions had to be made to prepare the company for a new digital ecosystem and unleash the innovative drive Microsoft once had. Jessi Hempel at Wired made a special report about Microsoft under the leadership of Nadella, who had been working at the company for over two decades.
Like Bloomberg, Hempel commented on the roots of the company, which started as motivation to power every personal computer. Bring productivity to every computer user around the world. Now that everybody was equipped with all the tools necessary, a new dawn had risen, the software era. While Microsoft was still generating tens of billions in revenue, its era of dominance might come to an end if it didn’t adjust course.
Microsoft had opened up its ecosystem, unlocking it from its operating system and bringing productivity to users everywhere. This vision was solidified during the announcement of releasing Microsoft Office to all Android and iOs devices in November 2014. Nadella bought the developer behind Minecraft for $2.5 billion to push itself in the gaming segment. The newly appointed CEO became a precursor for Nokia’s future.
Selling Nokia
In May 2016, Microsoft announced it would sell Nokia feature phones business units. The mobile devices segment would be sold to private equity firm HMD Global and Foxconn subsidiary FIH Mobile. Microsoft would license the brand name Nokia for ten years to HMD. with Microsoft receiving $350 million for the business unit. A far cry from the billions it spent on acquiring and restructuring Nokia.
Ian Fogg from the IHS Technology research team told the BBC that devices were never a core part of Microsoft’s strategic vision for Nokia. Fogg referenced the major lay-offs at the devices business unit, which displayed Microsoft had little interest in manufacturing phones. The deal with HMD served as the perfect opportunity to remove the segment from its new vision.
Chief executive at HMD global, Arto Nummela, said in a statement that the company would be fully focussed to unify Nokia branded smartphones and tablets. Believing potential customers would love to see these new products. Acquiring the Nokia brand would serve as the strategic vehicle to market the new line of devices. Nummela commented that branding had become the critical differentiator in the mobile market. The team at HMD would use its marketing and sales expertise to accelerate brand recognition.
In October 2023, Satya Nadella told Business Insider reflected on selling Nokia, stating that it was one of the hardest decisions he had to take as an executive. Commenting that there were avenues where Microsoft could’ve made mobile work, highlighting reinventing the computing category and how it interacts with mobile devices such as smartphones and tablets.
Nokia business flatlines
The central question is why Microsoft was dead set on acquiring Nokia, as the company was already struggling before Microsoft considered purchasing it. Net income at Nokia peaked in 2007, where the company generated €7.2 billion in net income worldwide. This number almost fell by 50 percent in 2008, falling to €3.98 billion. Careful readers will point out that this was at the start of the global economic meltdown, but in the following two years, Nokia was able to generate a net positive.
From 2011, the tides started to shift, where Nokia generated a loss of €1.16 billion and the following year another loss of €3.1 billion. Losses greatly reduced to €615 million, but it practically nullified all efforts of the previous three years. Microsoft was able to turn the ship around, as in 2016, Nokia recovered, generating a net income of €3.46 billion. But this didn’t last long, with revenues plummeting sharply in 2017.
In February 2011, research fellow at MIT Sloan School’s Center for Digital Business, Michael Schrage, wrote for the Harvard Business Review, that Nokia had lost its footing by ignoring the North American market. Nokia was focussing its efforts on Europe, where it had market dominance and growing its presence in Asia. Through this strategic blunder, Schrage argued that Nokia was caught off guard by Apple’s iPhone and Google’s Android operating system.
Recovering from these disruptive forces would’ve been difficult for established players, let alone a company like Nokia who had minimal presence in the United States. In hindsight Schrage’s observations were true at the time, but even if Nokia had a larger presence in North America, there was no guarantee it could’ve curbed its fortunes. Perhaps only delaying the inevitable. BlackBerry had a large following and brand in North America and even this mobile behemoth didn’t stand a chance against the rapidly changing mobile landscape.
In April 2012, as Nokia accumulated a loss of $1.2 billion, questions were raised whether the company would be able to reinvent itself in order to turn its fortunes around. The New York Times commented that the company’s new Lumia 900 device was seeing modest pick-up, the announced price cut to boost sales, wasn’t enough to please investors. We can only speculate as to why Microsoft opted for Nokia despite all the obvious shortcomings.
Failed negotiations
Microsoft, without doubt, felt cornered by Apple and Google, with Ballmer refusing to stray away from his belief that Microsoft was a devices company. The only viable option at the time was Nokia, who still had some presence in the smartphone space through its brand, with a lot of patents, hardware expertise and most importantly a willingness to negotiate. This would prove disastrous during the negotiation stages and the Achilles Heel that sealed the inevitable fate of Nokia.
In January 2024, The Harvard Law School detailed several critical errors in the negation phase leading up to the deal between Microsoft and Nokia. The article opens by stating that Microsoft wrote off nearly the entire deal and had laid off thousands of employees by July 2015, briefly after the acquisition was finalized. The acquisition became a headache for Microsoft, which could’ve been prevented during the negation phase, Harvard argued.
The staff at Harvard pointed out that Microsoft and Nokia had already been collaborating since 2011, through Nokia installing the Windows mobile operating system on its devices. It was then Microsoft CEO Steve Ballmer who presented the idea of possible acquisition in January 2013 to Chairman of Nokia’s board of directors, Risto Siilasmaa. At the time both concluded that there were inefficiencies in both businesses’ operations that would complicate the acquisition.
This didn’t dissuade Nokia from pursuing a possible merger. In order to prepare itself for the deal, it wished to recover its devices division to be better equipped against Google’s Android system. The time Nokia was able to buy, would optimize its acquisition position, forcing a better deal at the negation table. Harvard Law calls this the best alternative to a negotiated agreement, or BATNA for short. We now know that Nokia failed to recover its operating results.
Despite this poor outlook, Siilasmaa believed that Nokia was worth more than the initial offer made by Microsoft. Executives at the company, Harvard commented, believed their mapping service was a strategic asset and could be used as leverage as it could be sold to other potential buyers. Nokia’s senior staff knew that Microsoft had no competitive product at the time and was dependent on complementary services to make a worthy alternative to services like Google Maps.
No more maps
Microsoft and Nokia eventually resolved the mapping obstacle, by agreeing to share the code that runs the service, with Nokia keeping the intellectual property rights. This detail is contrary to many news revolving around the acquisition, which was heavily framed as Microsoft purchasing the entirety of Nokia, including all its underlying assets. Seemingly minor, this proved to be disastrous to the bargaining power of Microsoft during the negotiations.
Guhan Subramanian, professor at Harvard Business School and Harvard Law School, explained that by adding ‘if’ conditions within a deal can heavily skew the conditions in favor of one of the parties involved. Changing the demand and request structure of the negotiation. Employing this tactic can backfire on the party on the receiving end, Harvard staff pointed out. In the case between Microsoft and Nokia, it was Microsoft, the acquirer, who caved into Nokia’s non-negotiable assets.
Shortly after the acquisition, Nokia used Here maps as its trump card. Rumors started to circle that Nokia was trying to sell the division to Apple, Alibaba or Amazon. Nokia would use the sale to boost its revenue, eyeing a sale worth $3.2 billion. While the sale price is far lower than its purchase price of $8.1 billion in 2008, it now proved a valuable asset. This also puts into context why Nokia was so reluctant to give up its maps division and forced Microsoft into weakening its demands.
In August 2015, Nokia announced that it found buyers for its mapping business, selling the business unit to Audi, BMW and Daimler. The deal, worth $3.1 billion, signaled the importance for automakers to develop their autonomous vehicle programs, CNET commented. By acquiring the mapping service, the automakers wouldn’t become dependent on services provided by Google or Apple.
The fall of Nokia
As an outside observer it’s always tempting to point toward a single event in history that has led to a particular business failure. In the case of the Nokia acquisition, we might be eager to point fingers toward Microsoft being unable to handle the rapid rise of Google and iPhone in the mobile market. This event definitely served as the catalyst that would drive Microsoft to acquire the smartphone manufacturer. But underneath the surface there were many factors that prevented Microsoft from truly grasping Nokia’s potential.
The cash position of Nokia was already unstable, generating hundreds of millions in losses, which accelerated after the unveiling of the iPhone. The iPhone dramatically reshaped how consumers and professionals would interact with their mobile devices. Native functionalities were replaced by apps, which could be developed by anyone in the world. Unlocking a new industry with established players ill-equipped to handle this drastic new business model.
This changing mobile landscape prompted Microsoft to explore its options. As Ballmer was a hardware oriented executive, the obvious solution, at the time, was to purchase a smartphone manufacturer. Its devices in turn could be powered by Microsoft software, including its Office suite. However, there weren’t a lot of manufacturers ready to sell, nor with the technological prowess to withstand the battering from Google and Apple.
However, we must not forget that it was also Ballmer who enabled Microsoft’s transition to a software company. He laid the foundations for a more agile Microsoft through a restructuring of the organization by creating cross-functional teams, flattening the product divisions to allow for easier collaboration. This strategy became aptly known as One Microsoft. It was this approach that allowed Nadella to reorient the company. Unfortunately, Ballmer’s approach didn’t prevent the demise of its mobile branch.
The fragile position of Microsoft led to opting for a less than desirable collaboration, costing billions with little clarity whether executives at both companies could turn the ship around and steer into more stable waters. Quickly, we witnessed the destiny of Nokia, may it be not stated explicitly. Nadella was ready and willing to abandon ship and refocus the company back to software. Nokia’s fate was sealed and Microsoft closed the chapter.
