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Google Inc (GOOG): Microsoft Corporation (MSFT) Doubles Down on Smartphones With Nokia Corporation (ADR) (NOK) Acquisition

In a move that shocked few, Microsoft Corporation (NASDAQ:MSFT) has announced the acquisition of Nokia Corporation (ADR) (NYSE:NOK)’s Devices & Services business and key licenses to support it. Microsoft Corporation (NASDAQ:MSFT) has committed to pay 5.44 billion Euros, roughly $7.2 billion, to increase its synergies in the mobile space as well as accelerate its share of the profit and growth in the mobile space. But will the gains justify the price?

Microsoft Corporation (NASDAQ:MSFT)

Where does Windows Phone stand?
As it stands, the Microsoft Corporation (NASDAQ:MSFT)/Nokia Corporation (ADR) (NYSE:NOK) smartphone partnership has been doing well, although it remains far behind the market leaders in the space. Apple Inc. (NASDAQ:AAPL) and Google Inc (NASDAQ:GOOG) are the leaders, while Microsoft Corporation (NASDAQ:MSFT) is scrambling to solidify itself as a credible third option. While recent data shows Windows Phone has caught and passed BlackBerry Ltd (NASDAQ:BBRY), beating the falling Canadian company is no longer as meaningful as it once was.

According to Gartner, in the most recent quarter Microsoft’s Windows Phone held the third slot, beating the flailing BlackBerry Ltd (NASDAQ:BBRY) operating system by more than one million handsets.

Operating System 2Q13 Units (in thousands of units) 2Q13 Market Share %
Android 177,898.2 79.0
iOS 31,899.7 14.2
Microsoft 7,407.6 3.3
BlackBerry 6,180.0 2.7
Bada 838.2 0.4
Symbian 630.8 0.3
Others 471.7 0.2

Data from Gartner

What does Microsoft stand to gain?
On paper, the move makes a lot of sense. Nokia Corporation (ADR) (NYSE:NOK) has helped push Windows Phone from little more than an afterthought to a legitimate, if distant, third choice. There’s also the fiscal side of the partnership, which saw Microsoft Corporation (NASDAQ:MSFT) making large payments to Nokia Corporation (ADR) (NYSE:NOK) to support the Windows Phone platform. Microsoft’s complete strategic rationale can be found here, but here are the highlights:

  • Increases per device gross margin from less than $10 per unit to more than $40 per unit
  • Focuses marketing investment
  • Integrated hardware R&D and design
  • Uses offshore cash
  • Saves on the quarterly platform support payments to Nokia Corporation (ADR) (NYSE:NOK) ($250 million in the most recent quarter)

Are there potential downsides?
As seen above the company stands to gain significantly but it must address several issues. The biggest is the fact that this may hinder the spread of Windows Phone. While the Nokia Corporation (ADR) (NYSE:NOK) alliance certainly was a driving factor for Windows Phone, other manufacturers have produced their own Windows Phone-based devices. More importantly, a keystone of Android’s success has been the number of manufacturers building phones based on Google Inc (NASDAQ:GOOG)’s OS. Will Microsoft Corporation (NASDAQ:MSFT)’s current licensees be willing to compete head to head with the company?

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