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Nokia Corporation (ADR) (NOK)’s Weakness

When I saw the announcement that Microsoft Corporation (NASDAQ:MSFT) was buying Nokia Corporation (ADR) (NYSE:NOK)‘s devices division, I just said, “Wow.” It’s almost identical to the reaction I had when I heard that Steve Ballmer was going to be stepping down from the CEO role. The two big changes coming back to back aren’t just a coincidence — Microsoft is in the midst of a transformation. Whether that’s a good thing or a bad thing remains to be seen, but you can no longer deny that something is in the works.

Nokia Corporation (ADR) (NOK), Microsoft Corporation (MSFT)

Nokia’s weakness

Remember when Nokia Corporation (ADR) (NYSE:NOK) was a big-time player in the mobile phone market? In 2010, Nokia sales made up 64% of smartphone sales in China. Those were good days. Now, Nokia accounts for just 1% of the Chinese smartphone market. China may seem to be an anomaly, but the company has suffered elsewhere, too.

Total revenue fell 24% year over year last quarter, with the devices and services division revenue falling 32%. The shortfalls are indicative of the company’s late entrance into the smartphone market; that market is now dominated by Apple Inc. (NASDAQ:AAPL) and Samsung.

Microsoft Corporation (NASDAQ:MSFT) is having a problem with its Windows phone sales, as well. In the U.S., Windows phones make up just 3.5% of the market. Internationally, it’s seen stronger growth, but the domestic market just isn’t working out. While there are Windows-based Samsung phones, they make up a very small percentage of the company’s total phone sales. Nokia Corporation (ADR) (NYSE:NOK) is the dedicated platform for Windows, but it holds just over 1% of the U.S. market. Meanwhile, Apple Inc. (NASDAQ:AAPL) and Samsung account for over 60% of U.S. sales.

Why combine now?

The reason for the move now is twofold. One, it brings Stephen Elop back into the Microsoft Corporation (NASDAQ:MSFT) fold well before Ballmer walks out. Two, this is a long game, and the earlier Microsoft starts working on the transition, the better it’s going to do in the long run. Let’s look at Elop first.

Elop left Microsoft Corporation (NASDAQ:MSFT) three years ago to work at Nokia Corporation (ADR) (NYSE:NOK) and attempt to turn the business around. While that move ended up netting very little for Nokia, the move to Windows Phone gave him lots of credibility at Microsoft. Even before the acquisition announcement, Elop was the odds-on favorite for the next Microsoft CEO. It now looks almost certain.

As to the long game, Microsoft Corporation (NASDAQ:MSFT) has to start pushing its mobile strategy in a new direction. In its presentation that accompanied the announcement, Microsoft highlighted the challenges and potential in the mobile market. In short, there’s a lot of business to be had, but pulling in Nokia Corporation (ADR) (NYSE:NOK) isn’t going to help the bottom line for years. Anyone thinking that this purchase is going to make waves in the next six months is deluded.

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