With the close ties between Microsoft Corporation (NASDAQ:MSFT) and Nokia Corporation (ADR) (NYSE:NOK), the $7.2 billion deal to acquire Nokia’s phone business was likely a smooth process, especially when you consider the size of the transaction. With former Microsoft executive Stephen Elop at the helm of Nokia, and a smartphone partnership going back over two years, agreeing on $7.2 billion probably never happened so easily.
But what now? Microsoft Corporation (NASDAQ:MSFT) is entering uncharted territory, and with all the noise about Nokia Corporation (ADR) (NYSE:NOK)’s loss of mobile phone market share the past year or two, it’s easy to forget that Nokia still ships more phones worldwide than any company not named Samsung.
The challenge
Through the first two quarters of 2013, Nokia Corporation (ADR) (NYSE:NOK) shipped 123 million mobile devices, 61.1 million last quarter alone. Xbox and Surface tablet shipments, the only hardware Microsoft Corporation (NASDAQ:MSFT) knows, aren’t even in the same ballpark as Nokia’s mobile phone sales.
Though Q2 Surface sales numbers are a bit fuzzy, a mere 1.8 million of the tablets were shipped through this year’s first quarter. After taking a $900-million charge last quarter to write-off inventory of unsold Surface tablets, it’s safe to say Q2 didn’t fare much better.
As for the Xbox 360, Microsoft Corporation (NASDAQ:MSFT) sold all of 9.9 million units its last fiscal year. Hopes are high for the new Xbox One, but not even one-foot-out-the-door CEO Steve Ballmer expects anything close to the volume of phones Nokia Corporation (ADR) (NYSE:NOK) ships. To make Microsoft’s upcoming task even more challenging, Nokia completes much of its phone manufacturing in-house, opting to farm as little work out as possible to maintain its margins.
Perhaps the biggest obstacle Microsoft Corporation (NASDAQ:MSFT) will face as it’s learning the mobile phone hardware business is doing so as it attempts to reverse Nokia Corporation (ADR) (NYSE:NOK)’s phone sales slide. Last year’s nearly 334 million units sold left Nokia firmly in second place globally, well ahead of Apple‘s 130 million, but was down significantly from 422.5 million units sold in 2011; and the downward trend has continued this year.
Meeting the challenge
The hurdles Microsoft will face, however, are not insurmountable — for a couple of reasons. The acquisition of Nokia’s devices and services unit includes keeping the people responsible for manufacturing its phones.
Certainly, there will be challenges integrating Nokia folks into Microsoft’s culture, but the approximately 32,000 Nokia employees that are expected to transfer to Microsoft after the deal closes — 18,000 of which are, “directly involved in manufacturing, assembly and packaging of products worldwide” –will make the transition considerably easier.
