Microsoft’s Nokia Nightmare

Last week saw a lot of spec­u­la­tion regard­ing Microsoft’s pos­si­ble acqui­si­tion of Nokia’s mobile devices busi­ness. The rumor was quashed by Stephen Elop speak­ing at the All Things D con­fer­ence who denied there had been any dis­cus­sion with Microsoft regard­ing an acqui­si­tion. Case closed then? Maybe not.

It is obvi­ous just how strate­gi­cally impor­tant the Microsoft deal is for Nokia. Its not over­stat­ing the sit­u­a­tion to say that Nokia’s very sur­vival and a major mobile hand­set ven­dor hinges on how effec­tively the tran­si­tion to Win­dows Phone 7 is han­dled and how suc­cess­ful the result­ing Nokia/Microsoft prod­ucts are in the mar­ket place. There is lit­tle or no room for error.

While the same can not be said about Microsoft — the com­pany is cer­tainly not going to go out of busi­ness if the Nokia deal doesn’t pan out — In my view Steve Ballmer’s con­tin­ued abil­ity to bring the Microsoft board along with him on this win­dows phone invest­ment binge does depend on Nokia’s suc­cess. Only Nokia can deliver WP7 the vol­ume it needs to viewed as a viable third alter­na­tive in the smart­phone oper­at­ing sys­tem busi­ness — I’m stick­ing by my pre­vi­ous pre­dic­tion of a pal­try 1.25M WP7 unit sales to date. Nokia is being given “First among equals” sta­tus in the smart­phone device man­u­fac­turer ecosys­tem because the future of Ballmer’s phone strat­egy — and per­haps his very posi­tion — depends on Nokia’s success.

[Update: 6/6/2011 — At last week’s All Things D con­fer­ence AT&T’s CEO Ralph De La Vega says that Win­dows Phone sales have not be liv­ing up to expec­ta­tions.]

Last weeks announce­ment by Nokia that it would miss its sec­ond quar­ter fore­cast and that its busi­ness was now so unpre­dictable that it could not offer any new fore­casts for the rest of 2011. The street dealt swiftly with that news by whack­ing 20% off Nokia’s stock price. That brings Nokia’s mar­ket cap down to around $24B. That’s 45% off its its peak in Feb­ru­ary 2011. Microsoft’s stock has trended in a very sim­i­lar fash­ion since the Nokia deal was announced and took a sym­pa­thetic hit last week when Nokia warned. Both com­pa­nies stock prices have been on the road to nowhere since the deal was announced but its the pre­cip­i­tous decline in Nokia’s stock price which should make Microsoft stock hold­ers very wor­ried. The real­ity is that if Nokia’s val­u­a­tion con­tin­ues to decline then Ballmer and team may be forced into acquir­ing Nokia.

At some price — not too far away from where it stands today — Nokia will — unavoid­ably — become a active takeover tar­get. I’ll bet there are enough block share­hold­ers who are dis­en­chanted enough with Elop and Microsoft’s strat­egy to be dying to dump their stock for the right pre­mium. Nokia’s book value stands at $5.37 and its clos­ing stock price on Fri­day last week was $6.66. That’s way to close for com­fort. Any fur­ther decline in the stock price and Elop’s days of being in con­trol of Nokia’s des­tiny look num­bered. Once the seri­ous 3rd party acqui­si­tion dis­cus­sions start Ballmer will be left with two very unpalat­able choices: either let Nokia be acquired and risk the unrav­el­ling of the entire Nokia strat­egy — killing any hopes for Microsoft’s mobile strat­egy in the process — or acquire Nokia — act­ing as “White Knight” — to pre­vent the com­pany falling into unfriendly hands; an act which would destroy the very core of Microsoft multi-OEM mobile busi­ness model.

Given Ballmer’s fanat­i­cal com­mit­ment to mak­ing sure Microsoft remains a viable player in the smart­phone busi­ness I can see only one pos­si­ble out­come if the sce­nario out­lined above comes to pass: Microsoft will end up buy­ing Nokia’s mobile busi­ness. Steve can­not afford for it to turn out any other way. The deci­sion will be ratio­nal­ized by the Microsoft lead­er­ship team as a real­iza­tion that — just like the XBox gam­ing busi­ness — the only way to com­pete with Apple and Google was to have con­trol of the com­plete end to end con­sumer expe­ri­ence and that own­ing a smart­phone man­u­fac­turer gives them the oppor­tu­nity to do that.

Every­one involved is going to deny that this is on the cards but in the end this is Microsoft’s likely Nokia night­mare and one they’re going to have to deal with sooner rather than later.

[Update: 6/9/2011 — Stephen Elop once again denies the com­pany is up for sale while speak­ing at the Open Mobile Sum­mit in Lon­don today. Again I would point out that while Nokia is not actively being offered for sale that is not going to pre­vent a hos­tile takeover attempt once the stock becomes too cheap to resist. The final deci­sion may not be Stephen Elops to make.]