Microsofts

Acquisition of Nokia
Submitted by:
Group 10
Abhinav Sehgal
Himganlung Gonmei
Punit Rathi
Rajul Mangal
Sakshi Goyal
Siddharth Garg

Industry developments
Industry witnessed a convergence of digital communications,
information systems, consumer electronics, as well as
software and digital content
More and more population started moving to mobile devices
leading to dip in PC sales
This affected Microsofts top line growth
By the end of 2012, Google Android had become the biggest
OS
Nokia slumped to 3rd position in market share of smartphones
thereby affecting its financials, almost running out of cash

Microsoft - Background
Microsoft is involved in the
development, manufacturing,
licensing and selling of computer
software
Microsoft windows is a market
leader in computer operating
system market
As major internet traffic is driven
by Mobiles, so it was imperative for
Microsoft to enter into mobile
software

PC/Laptop
Microsoft and Microsoft is the
Nokia market leader
for Computer
Operating
Systems
Google
Android

Smartphone

Tablet

Microsoft is trying to increase

penetration in both markets in
Hardware and Software

Google Android is the market

leader for Operating Systems in
smartphones and tablets

Apple Apple have the wider range of products from

Hardware to Software in all the three devices
markets and is positioned within the top players
Samsung

Used Nokia as a platform and

entered
into a contract with Nokia
Current
Microsofts
Situation
own phones and tablets have failed so far
Nokia Lumia have accounted for over 80% of Windows
Phones sales
OEM model proves to be expensive

Samsung is within the top two

players in hardware for both
devices market

Nokia - Background
Nokia was a leading mobile manufacturer and had 37% of the
smartphone market
It was using Symbian as the operating system software
In 2011, Nokia announced to choose Microsoft Windows as its
main smartphone
Nokia was exclusively using MS Windows on high end
smartphones
Current
Nokia
Situation
was loosing dominance in the market due to players like
Samsung, Apple
Were burning cash rapidly
Wanted to differentiate themselves and thought that Windows OS will
help them with it

he Seven Clauses of Contracts

A
B
C
D
E
F
G

Strategic Coordination
Concerns the process set up to redefine the coalition objective

Organizational Coordination
Concerns the ability to re-assign tasks among participants or reorganize
tasks

Operational Coordination
Concerns the power to modulate the usage of different assets involved in
the transaction

Credible Commitment System

Aims to protect each agent from his partners opportunism

Supervision Mechanism
Aims at ensuring that each party respects its promises

Remuneration System
Solves risk sharing & effort incentive problems

Contract Duration
Can be spot, short-term or long-term

Seven Clauses of Contracts (Microsoft Nokia)

Object of clause

Agents
Involved

Possible object
alternatives

Reasons
a)
b)
c)

Strategic
Coordination

Nokia

Decentralized
Authority

Organizational
Coordination
Mode

Nokia

Decentralized
Authority

Credible
commitment

Nokia

Bilateral Application

Residual rights will allow both the agents to redefine the solutions
Both can bargain the use of resources ex-post rather than ex-ante
Creating a third ecosystem by opening a new Nokia branded global application
store leveraging Windows phone marketplace infrastructure
d) Joint marketing initiatives and shared development roadmap
a) Liberty to reorganize the production and exchange process
b) Joint developer outreach and application sourcing to support creation of new
local & global apps

a) Bilateral hostage model implemented to create a mutual reliance relationship

b) Microsoft agreed to pay $1bn for supporting new windows phone 7 OS showing
an non recoverable investment to establish commitment towards alliance
Joint governing body consisting of executives from both agents

Supervision
Mechanisms

Remuneration
Systems

Nokia

Self-Enforcement

Nokia
Flat rate

Contract Duration

Nokia

Long Term

a) Microsoft will receive a running royalty from Nokia for the Windows Phone
platform
b) Predefined the value of intellectual property and mechanisms for exchanging
rights to intellectual property in which Nokia will receive substantial payments
under the agreement.
large volumes that Nokia expects to ship, as well as a variety of other
considerations related to engineering work to which both companies are
committed would create economies of scale in the long term and help create the

Microsoft Options Available

Extend the contractual relationship with Nokia
- Feasible option but Microsoft will miss out on the option of
vertically integrating and creating an ecosystem like Apple
Expand on the strategy of tapping on 3rd party hardware
manufacturers like HTC, Samsung through licensing
- Present tie-ups were not able to drive penetration of
Windows mobile, part reason being minimum royalty
payments for android and greater acceptability
Buy Nokia
Current Partnership

Royalty gross margin of

less than $10 per device
Marketing investment

Acquire Nokia

Royalty gross margin of

$40 per device
Focused marketing
investment
Opportunity to create an
ecosystem

Microsoft - Make or Buy

Nokia Options Available

Develop advanced operating system to compete against ios and android
- Slow progress and high cash burn rate, opportunities to differentiate with that
ecosystem seemed slim
Adopt android
- Was bound by Microsofts binding contractual obligation
Continue with Windows
- Nokia board had lost faith in Windows OS strategy seeing no major growth in
sales figure
Sell off device unit and concentrate on other business
- Will get cash to support its other business and in-house developments
- Terms allow it to make mobile phones using any OS, as long as they are not
marked under the Nokia brand

Advantage to Microsoft
Microsoft projected cost synergies of $600 million within 18 months after its close and $45 billion
in revenues by 2018
It will be able to emerging countries through Nokias presence, allowing to gain bigger foothold
around the world
Microsoft will be able to increase its royalty from less than $10 per Windows Phone-based Nokia
handset sold to $40
Nokia has the largest base of feature phone users, and Microsoft can hope for them to stay within
the Windows Phone ecosystem when they upgrade to smartphones
Success in phones helps in success in tablets which in turn will help in success in PCs
Will allow it software team to work closely with hardware team and create a ecosystem thereby
controlling integration
Push for mobile wallet by getting operating system in more and more hands

dvantage to Microsoft (Contd..)

As
-

per the reasoning put forth by Microsoft, acquisition will also help Microsoft in:
Protecting windows future by providing first party hardware
Provide globally scaled supply chain
Device distribution and sales network
Device design and engineering expertise

Advantage to Nokia
Got free cash to invest in other businesses as device business was
becoming a sinking ship

Ally or Acquire
Parameter
Types of synergy
Nature of
resources
Extent of
redundant
resources
Degree of market
uncertainty
Level of
competition

Factor

Strategy

Rationale

Acquisition

Both will gain by integration of hardware

and software development.

Acquisition

R&D, vast supply chain and service

network forms the core competency

Medium

Equity alliance

Redundant resource post acquisition will

include Nokia engineers working on os
development

Low

Non-equity
alliance/
Acquisition

The signs of population moving towards

smartphone and the exponential growth
it will witness was clear

Acquisition

Two operating systems commanded lion

share of the market and competition
among hardware manufacturers was
high

Reciprocal
Medium

High

The Deal
MS acquired Nokia for $7.2 Billion all cash deal
It involves Nokias Mobile Phones and Smart Devices business units including Nokias
design team and its operations, all related production facilities, sales and marketing
functions, and related activities.
Nokia transferred 32,000 employees to Microsoft
Microsoft licenses, but does not acquire, non-related Nokia IPRs: a non-exclusive
license of patents for 10 years, right to the Nokia brand for 10 years, and certain rights
in relation to HERE services.
Nokia was restricted in the use of its own brand in mobile devices for 30 months or
until the beginning of year 2016, but the deal does not prevent Nokia from making

References
Payment Implications of Microsofts Nokia Acquisition:
http://www.portal.euromonitor.com/portal/analysis/tab
Microsoft Acquires Nokia: Implications for the Two Companies and Finland:
https://www.etla.fi/wp-content/uploads/ETLA-Muistio-Brief-16.pdf
For Microsoft, Nokia Represents A Crossroads In Its Emerging Markets Strategy:
http://techcrunch.com/2013/09/03/for-microsoft-nokia-represents-a-crossroads-in-its-emergin
g-markets-strategy/
Microsofts strategic rationale for deal announced with Nokia on September 3, 2013:
http://news.microsoft.com/download/press/2013/StrategicRationale.pdf
For Microsoft, Nokia Represents A Crossroads In Its Emerging Markets Strategy:
http://techcrunch.com/2013/09/03/for-microsoft-nokia-represents-a-crossroads-in-itsemerging-markets-strategy/