Analysis: Microsoft's Nokia deal leaves investors cold

SEATTLE Fri Feb 11, 2011 5:39pm EST

SEATTLE (Reuters) - Microsoft Corp (MSFT.O) has yet to persuade investors that a deal to put its Windows software on Nokia Corp (NOK1V.HE) phones is not just two losers hoping to combine into one winner.

The financial benefits for Microsoft are not clear. By the time new phones born out of their alliance hit the market, both may have ceded more market share to Apple Inc's (AAPL.O) iPhone and Google Inc's (GOOG.O) Android system.

And some point out the risk that Nokia's full-scale endorsement may alienate rival phone makers such as Samsung Electronics Co Ltd (005930.KS) and LG Electronics Inc (066570.KS), now supporters of Microsoft's fledgling Phone 7 platform.

"They do have to actually put some phones out there in the market and, as best I can tell, that's easily six months down the road," said Al Hilwa, an analyst at tech research firm IDC. "The Android market is moving really fast. They've got their work cut out."

The deal is a "an opportunity, rather than a slam-dunk," he added. "We'll have to wait and see how this works out."

Most industry-watchers agree Microsoft's tie-up is an effective way for the software company to get its operating system on some 30 million phones a quarter without a costly and disruptive acquisition, putting it back on the smartphone playing field.

But its shares fell as much as 1.6 percent as investors worried how it would work in practice.

"It's a great arrangement from Microsoft's standpoint," said Sid Parakh, an analyst at McAdams Wright Ragen. "But it's very hard to model these things out, given we don't know what the financial terms are, we don't know what the timelines are, and we don't know what kind of monetization to expect."

Microsoft and Nokia are hammering out the financial details of their "broad strategic partnership" to make Windows Phone 7 the primary operating system for Nokia phones.

But broadly, Nokia will pay royalties for licensing the phone software and in return Microsoft will invest in marketing and developing the phones, but it isn't clear which will be the greater sum.

BATTLE OF ECOSYSTEMS

Analysts said the licensing agreement is complicated by the fact some of Nokia's technology will be included in the phones, such as mapping and navigation. The Finnish phone-maker may also get a cut of the revenue Microsoft gets from putting its Bing search engine on the devices.

That alone could be worth $1.25 billion a year to Microsoft, estimates Richard Williams at Cross Research.

"What's really going to prove important is whether they get enough of a strong ecosystem out there in terms of developers, applications, advertising monetization, relationships with carriers," Hilwa said.

Nokia failed to generate developer excitement with its Symbian system and Microsoft is only just beginning to make its mark on the burgeoning app markets, where users can download a variety of useful tools and games to their devices.

Microsoft has only about 8,000 apps for Windows Phone 7, compared with some 15,000 for Research in Motion Ltd's RIM.TO BlackBerry, more than 100,000 for Google's Android system and more than 300,000 for Apple's iOS on iPhones and iPads.

"Microsoft is still in development mode really," said Avi Greengart, research director for consumer devices at Current Analysis. "There are core features that aren't there yet, things as simple as cut and paste."

Analysts are hoping for more details on Microsoft's technical plans for Windows Phone 7 at the annual Mobile World Congress in Barcelona next week.

There are questions about how much Microsoft will allow Nokia to customize its software and whether its agreement with Nokia will discourage handset makers such as Samsung Electronics, LG and HTC Corp (2498.TW) -- currently the chief supporters of Windows Phone 7 in the United States.

That is a risk Microsoft is willing to take, said NPD Group's consumer electronics and wireless industry analyst Ross Rubin, given it gets a large, dedicated phone designer committed primarily to its software rather than Android.

"By focusing primarily on Windows Phone 7, Nokia will be creating more competitive handsets for that operating system, as opposed to other manufacturers that are focusing primarily on Android," said Rubin.

Microsoft only had a 4.2 percent share of the global smartphone market last year, according to research firm Gartner, trailing Apple with 15.7 percent, Research in Motion with 16 percent and Google's Android with 22.7 percent.

Despite steadily losing share, Nokia's Symbian was still the leader last year, with 37.6 percent of the smartphone market. But most of those were lower-end devices compared with the likes of the iPhone.

The question now is how much, and how fast, Microsoft can capitalize on that market share.

"Nokia has a tremendous brand presence, not in North America, but pretty much everywhere else in the world, and a reputation for hardware quality that's second to none," said Greengart. "But Microsoft and Nokia are going to have tremendous execution risk."

The coming together of two slow-moving titans may not ultimately pay off, warned Pierre Ferragu, an analyst at Sanford C. Bernstein in London.

"A partnership with another heavy giant doesn't sound like the right remedy," he added.

(Editing by Edwin Chan; and Andre Grenon)

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (1)
ulludapattha wrote:
“But Microsoft and Nokia are going to have tremendous execution risk.”

The “execution risk” does not end there. Last evening there was a story on a major Finnish business daily saying that the chairman of the Finnish private investors federation said that this deal de facto opened the way for the ultimate acquisition of Nokia by Microsoft and made it a dirt cheap acquisition!

In the comments following that story, some commentators suggested that this deal is not possible to be completed under Finnish Company law without the approval of the Nokia Board. That raises the question: Was this deal approved by the Nokia Board before it was announced in London yesterday? If it was approved beforehand , then most commentators blamed Mr Jorma Ollila for having ignored the interests of private Finnish investors, who have nothing to gain from this deal. Most demanded that Ollila step down as Board chairman immediately. A few even went to the extent of putting Ollila on trial for wilfully damaging the financial interests of his own fellow countrymen in Finland!

Hopefully, this burst of Finnish anger at this deal does not escalate to more than just rhetoric. However, investors on Wall Street must not ignore the possibility of a backlash in Finland ahead of the parliamentary elections in April this year. Even Finnish PM Ms Mari Kiviniemi expressed deep concern saying this was a “sign of crisis”. She is from Finland’s Centre party, that has historical ties with Nokia. Mr Ollila was a member of the Centre party in his youth and was also tipped to be Presidential candidate of that party in 2006. Ollila refused then.

The Centre party is struggling to retain its position as leader in Finland’s coalition government having to fight off graft accusations against its former Prime Minister.

So, there is a perfect recipe for this deal to rise as a key domestic political issue in Finland’s upcoming parliamentary elections. If this worst case scenario materialises the whole deal could be bogged down either in litigation here in Finland or cause an uproar in Finnish parliament or worse still lead to a resistance movement within Nokia as was foreseen by a noted Finnish blogger yesterday.

Not yet the time to throw a champagne party at Microsoft headquarters in Redmond.

Feb 12, 2011 2:45am EST  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.