Analysys Mason Limited 2013 9 September 2013

Analyst view: Microsoft deal positions Nokia for a

stronger focus on B2B markets
9 September 2013
Alexandra Rehak, Ronan de Renesse and Eva Weidinger
Microsoft and Nokia announced on 3 September 2013 that Microsoft plans to acquire Nokias Devices and
Services business, including the Mobile Phones and Smart Devices business units. The agreement is expected to
close in the first quarter of 2014 for a total transaction value of EUR5.44 billion, of which EUR3.79 billion is
for the devices and services unit, and EUR1.65 billion is for licensing Nokias patents.
As part of the agreement, ownership of Nokias patent portfolio would remain with Nokia Solutions and
Networks (NSN), although Microsoft would acquire a 10-year licence and have the right to extend the
agreement in perpetuity.
The Nokia brand will remain with Nokia. However, Microsoft will license the use of the Nokia brand on its
handsets and will acquire Nokias two most-successful device brands Asha and Lumia, which accounted for
4.3 million and 7.4 million unit shipments, respectively, in the second quarter of 2013. The Devices and
Services business unit generated revenue of EUR2.7 million at the end of the second quarter 2013.
Nokia will retain its other technology units, including NSN (formerly Nokia Siemens Networks), Nokia HERE
mapping and location platform and services, and the companys CTO office. Microsoft would also license and
use Nokias HERE services.
Our analysis: what does it mean for the mobile device market
and for Nokia?
The acquisition will have limited impact on the smartphone market in short-to-medium term, but
increases the chance of the Windows Phone OS building a strong foothold, which thus far it has struggled
to do (see Figure 1). Microsoft and Nokia have been working together for 2.5 years on the Lumia device
range. We do not expect the acquisition to result in fundamental changes to the Lumia team and its product
roadmap for the next 12 months.
Figure 1: Smartphone shipments by operating system, worldwide, 20072017 [Source: Analysys Mason, 2013]

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Analyst view: Microsoft deal positions Nokia for a stronger focus on B2B markets | 2

Analysys Mason Limited 2013 9 September 2013
The greatest opportunity for Microsoft is in the feature phone and low-end smartphone space,
targeting emerging market mobile users in particular. In 2012, 45.5% of Nokias mobile device shipments
went to Greater China, the Middle East and Africa, and Latin America. This acquisition strengthens
Microsofts position versus Google in connecting the next billion.
Microsoft must make a decision on the business model to adopt in the mobile sector. No handset
manufacturer except Nokia has been fully committed to the Windows Phone platform in the past
12 months. The handset market is extremely competitive, making it difficult to sustain high margins.
Microsoft potentially has the ability to undercut its competitors and use mobile devices as a loss leader to
gain worldwide reach for its services and software ecosystem, if it chooses this approach.
For Nokia, the deal provides a much healthier balance sheet and the ability to focus on its
infrastructure and B2B strengths, moving away from the fast-moving and highly competitive mobile
devices business, where it has been steadily losing ground since 2007. NSN is well-positioned to be a
leading provider of LTE infrastructure it is already supplying LTE-A network equipment for all three of
South Koreas mobile operators, putting it in a strong position to work with service providers that are
looking to provision next-generation networks. The annual income of the patents business is estimated at
EUR500 million, which provides a further healthy revenue stream.
Nokias results are steadily improving as NSN implements cost-cutting measures and refocuses its business.
Shedding the handset business should allow it to consolidate the turnaround with a clear focus on B2B markets,
but marks the end of an era, as Nokia concedes the market it once led to nimbler competitors in the device
space.