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How Microsoft Might Benefit from the Nokia Deal

If it can cleverly blend hardware and software in new ways, reach new markets, and take advantage of Nokia’s patent portfolio, Microsoft’s billions could be well spent.
September 5, 2013

Nokia might have gotten the better of Microsoft this week in selling its once-dominant handset business to Microsoft and entering into a broad patent agreement in a deal worth $7.1 billion. Microsoft’s stock price took a big hit. And no wonder: given the declining state of Nokia’s business, the deal seemed like a desperate attempt to prop up the largest manufacturer of phones that run Windows before it went under or switched to Google’s Android system.

But there are at least four ways Microsoft might come up a winner in the long run. With less than 4 percent of the global market for smartphone operating systems, Microsoft has little more to lose and a lot, potentially, to gain as it tries to claw market share from Android and Apple.

Here’s how Microsoft could benefit significantly.

1. Skype, the dominant voice-over-Internet service owned by Microsoft, could become more powerful. Microsoft can now push Skype across its Xbox gaming/TV console, Nokia devices, Surface tablets, all PCs, and Android and Apple phones. That’s more of the world than Apple or Google can address with their FaceTime or Hangouts chat services. Skype is being steadily integrated more deeply into Windows; it will be preinstalled in Windows 8.1 on the desktop. It could become a way for Microsoft to compete with conventional cellular carriers on voice and messaging, where there’s money to be made.

More generally, Microsoft might now be able to do something that Apple or Google haven’t or can’t: integrate mobile devices and desktops into a more seamless experience. Google is limited in this regard because it doesn’t control PCs, although it is doing things like putting Google Now, the company’s intelligent personal assistant, into its main website. Apple has required users to use iTunes, and more recently iCloud, to sync up their phones with their laptops, but perhaps Microsoft can use Skype and other apps as the basis of a simpler and more compelling multi-device experience.

2. Leaving aside the patents that Microsoft acquired, Nokia retains ownership of some of the most valuable and fundamental patents—known as “utility patents” in the wireless industry. While Microsoft didn’t buy those, it did license all of them for 10 years, giving it a free reign that rival phone makers won’t necessarily have.

Over the last two decades or so, Nokia spent more than $55 billion on R&D and made acquisitions that gave it a war chest of 30,000 patents. Many of these cover fundamental operations and ones for wireless standards like GSM (see “Nokia’s Patents Are Its Last Line of Defense”). One of Nokia’s most valuable patents is one describing a “method for mapping, translating, and dynamically reconciling data.” This is now fundamental to syncing calendars on different devices. And now that it is free of its handset business, Nokia can focus more on monetizing this fundamental IP—in court, if necessary. Nokia will no longer have to worry about countersuits alleging infringements by technologies in its phones, since it will no longer be making or selling any. And if Nokia does decide to go for the jugular, Microsoft’s neck will be protected.

Nokia has shown aggressiveness before. In a 2009 suit against Apple, Nokia claimed that the iPhone maker had violated 46 Nokia patents, on everything from wireless standards to touch-screen controls. Apple agreed to settle two years ago. Nokia gets more than $600 million every year in patent-related revenue.

Nokia’s announcement included this clue: the company plans to “expand its industry-leading technology licensing program, spanning technologies that enable mobility today and tomorrow.” 

3. Microsoft may gain a deeper store of research knowledge to draw from. Nokia spent lavishly on R&D—including more than $5 billion last year alone—and had 27,551 R&D employees at the end of 2012. It’s true that the value of their collective output is dubious: Nokia R&D failed to produce technologies that could dent the dominance of Apple and Samsung in the smartphone business (see “Can This Man Work Magic?”).

Oskar Sodergren, a Nokia spokesman, says that while the Nokia Research Center stays with Nokia, all R&D staff related to mobile products and smartphones will all transfer to Microsoft. Presumably, these are the people who gave us things like “Morph Concept” technologies—in which a phone or watch can be made flexible and transparent, with built-in solar-power recharging and integrated sensors.

A Microsoft research spokeswoman, Chrissy Vaughn, says the company was not elaborating on how the research units might merge. But Steve Ballmer, Microsoft’s outgoing CEO, said in a press call yesterday that “Finland will become the hub and the center for our phone R&D.” The two companies have said that all of Nokia’s 4,700 Finnish employees who now work in devices and services will become Microsoft employees.

4. The smartphone business is still ramping up quickly, which means there remains a lot of opportunity, especially in international markets that are far from saturated. Nokia sells more than 200 million phones annually—and most of them are not in Europe or North America. Although Microsoft will have to compete with legions of low-cost manufacturers (see “Here’s Where They Make China’s Cheap Android Smartphones”), it might be able to use Nokia’s international manufacturing and distribution to its advantage—assuming, of course, that it can do something truly novel on the phones themselves.

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