Global Strategic Alliance: Nokia & Microsoft

International Business
Institute of Engineering & Management Md. Abdullah Khan
PGDM/2010/014 PGDM-2ND YEAR, 2012-04-25

NOKIA CORPORATION
Nokias mission is simple: Connecting People. Nokias goal is to build great mobile products that enable billions of people worldwide to enjoy more of what life has to offer. Nokias challenge is to achieve this in an increasingly dynamic and competitive environment. Ideas, Energy, Excitement, Opportunities. In today's mobile world, it feels like anything is possible - and that's what inspires us to get out of bed every day. Nokia Corporation is a Finnish multinational communications corporation headquartered in Keilaniemi, Espoo. It manufactures mobile electronic devices, mostly mobile telephones and other devices related to communications, and in converging Internet and communications industries, with 130,000 employees in 120 countries, sales in more than 150 countries and global annual revenue of over 38 billion and operating loss of 1 billion as of 2011. It was the world's largest manufacturer of mobile phones in 2011, with global device market share of 23% in the second quarter. Nokia produces mobile devices for every major market segment and protocol, including GSM, CDMA, and W-CDMA (UMTS). Nokia offers Internet services such as applications, games, music, maps, media and messaging through its Ovi platform. Nokia's joint venture with Siemens, Nokia Siemens Networks produces telecommunications network equipment, solutions and services. Nokia also provides free-of-charge digital map information and navigation services through its wholly owned subsidiary Navteq. Nokia is a public limited-liability company listed on the Helsinki, Frankfurt, and New York stock exchanges, and plays a very large role in the economy of Finland, accounting for about a third of the market capitalization of the Helsinki Stock Exchange (OMX Helsinki) in 2007. The Nokia brand, valued at $25 billion, is listed as the 14th most valuable global brand in the Interbrand/BusinessWeek Best Global Brands list of 2011. It is the 14th ranked brand corporation in Europe (as of 2011), the 8th most admirable Network and Other Communications Equipment company worldwide in Fortune's World's Most Admired Companies list of 2011, and the world's 143rd largest company as measured by revenue in Fortune Global 500 list of 2011.
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MICROSOFT CORPORATION:
As a company, and as individuals, we value integrity, honesty, openness, personal excellence, constructive self-criticism, continual self-improvement, and mutual respect. We are committed to our customers and partners and have a passion for technology. We take on big challenges, and pride ourselves on seeing them through. We hold ourselves accountable to our customers, shareholders, partners, and employees by honoring our commitments, providing results, and striving for the highest quality. Diversity and inclusion are integral to Microsofts vision, strategy and business success. We recognize that leadership in todays global marketplace requires that we create a corporate culture and an inclusive business environment where the best and brightest diverse minds employees with varied perspectives, skills, and experiences--work together to meet global consumer demands. The collaboration of cultures, ideas, and different perspectives is an organizational asset and brings forth greater creativity and innovation. Microsoft Corporation is an American multinational corporation headquartered in Redmond, Washington, United States that develops, manufactures, licenses, and supports a wide range of products and services predominantly related to computing through its various product divisions. Established on April 4, 1975 to develop and sell BASIC interpreters for the Altair 8800, Microsoft rose to dominate the home computer operating system market with MS-DOS in the mid-1980s, followed by the Microsoft Windows line of operating systems. Microsoft would also come to dominate the office suite market with Microsoft Office. The company has diversified in recent years into the video game industry with the Xbox and its successor, the Xbox 360 as well as into the consumer electronics and digital services market with Zune, MSN and the Windows Phone OS. The ensuing rise of stock in the company's 1986 initial public offering (IPO) made an estimated three billionaires and 12,000 millionaires from Microsoft employees (Forbes 400 list revealed that in March 2011 both Jon Shipley and Nathan Myhrvold lost their billionaire status). In May 2011, Microsoft Corporation acquired Skype Communications for $8.5 billion.

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THE STRATEGIC ALLIANCE: NOKIA & MICROSOFT

A Strategic Alliance is a relationship between two or more parties to pursue a set of agreed upon goals or to meet a critical business need while remaining independent organizations. This form of cooperation lies between M&A and organic growth. Partners may provide the strategic alliance with resources such as products, distribution channels, manufacturing capability, project funding, capital equipment, knowledge, expertise, or intellectual property. The alliance is cooperation or collaboration which aims for a synergy where each partner hopes that the benefits from the alliance will be greater than those from individual efforts. The alliance often involves technology transfer (access to knowledge and expertise), economic specialization, shared expenses and shared risk. On 11 February 2011, Nokia's CEO Stephen Elop, a former Microsoft employee, unveiled a new strategic alliance with Microsoft, and announced it would replace Symbian and MeeGo with Microsoft's Windows Phone operating system except for mid-to-low-end devices, which would continue to run under Symbian. Nokia was also to invest into the Series 40 platform and release a single MeeGo product in 2011. This news was not well received by consumers, and has contributed to the decline in the stock price by 11%. As part of the restructuring plan, Nokia planned to reduce spending on research and development, instead customising and enhancing the software line for Windows Phone 7. Nokia's "applications and content store" (Ovi) becomes integrated into the Windows Phone Marketplace, and Nokia Maps is at the heart of Microsoft's Bing and AdCenter. Microsoft provides developer tools to Nokia to replace the Qt framework, which is not supported by Windows Phone 7 devices. Symbian becomes described as a "franchise platform" with Nokia planning to sell 150 million Symbian devices after the alliance was set up. MeeGo emphasis is on longer-term exploration, with plans to ship "a MeeGo-related product" later in 2012. Microsoft's search engine, Bing becomes the search engine for all Nokia phones. Nokia also gets some level of customisation on WP7. After this announcement, Nokia's share price fell about 14%, its biggest drop since July 2009.
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As Nokia was the largest mobile phone manufacturer worldwide at the time, it is suggested the alliance would make Microsoft's Windows Phone 7 a stronger contender against Android and iOS. In June 2011 Nokia was overtaken by Apple as the world's biggest smartphone maker by volume. In August 2011 Chris Weber, head of Nokia's subsidiary in the U.S., stated "The reality is if we are not successful with Windows Phone, it doesn't matter what we do (elsewhere)." He further added "North America is a priority for Nokia (...) because it is a key market for Microsoft."

KEY POINTS OF THE STRATEGIC ALLIANCE:

According to the press release, this is what the proposed partnership consists of: Nokia would adopt Windows Phone as its principal smartphone strategy, innovating on top of the platform in areas such as imaging, where Nokia is a market leader. Nokia would help drive the future of Windows Phone. Nokia would contribute its expertise on hardware design, language support, and help bring Windows Phone to a larger range of price points, market segments and geographies. Nokia and Microsoft would closely collaborate on joint marketing initiatives and a shared development roadmap to align on the future evolution of mobile products. Bing would power Nokias search services across Nokia devices and services, giving customers access to Bings next generation search capabilities. Microsoft adCenter would provide search advertising services on Nokias line of devices and services. Nokia Maps would be a core part of Microsofts mapping services. For example, Maps would be integrated with Microsofts Bing search engine and adCenter advertising platform to form a unique local search and advertising experience Nokias extensive operator billing agreements would make it easier for consumers to purchase Nokia Windows Phone services in countries where credit-card use is low. Microsoft development tools would be used to create applications to run on Nokia Windows Phones, allowing developers to easily leverage the ecosystems global reach. Nokias content and application store would be integrated with Microsoft Marketplace for a more compelling consumer experience.

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NOKIA & MICROSOFT ALLIANCE: WINNERS AND LOSERS

Well, undoubtedly the biggest winner is Microsoft. Not only does this move mean that it will inevitably make significant gains in Windows Phone marketshare, its also managed to eliminate Nokias Symbian OS as a competitor. Also, its managed to win over an OEM and get them to effectively dump their own established ecosystem in favor of its embryonic ecosystem. Microsoft also gets its hands on Nokias Ovi/NAVTEQ mapping assets. Given the number of times this was mentioned at todays live event, I think that this is what Microsoft wanted more than anything. Well, in case of Nokia the company is fighting for survival, and this deal no doubt guarantees its survival for now. But its hard to see how in the long term Nokia can do much to differentiate itself from other OEMs. Sure, Nokia makes some good, solid hardware, but its this good solid hardware (overengineering some might say) that got the company into the mess its in. Today Nokia truly becomes just another Microsoft OEM. The company has managed to gain more freedoms than other WP OEMs (more on that in a moment), but another OEM it is nonetheless. Its definitely a bad day for Nokia employees. There were strong suggestions that this move would mean job losses at Nokia. Its also a bad day for Google. Why Google? you might ask. Because in choosing a new platform for its products, Nokia went with Microsofts WP platform rather than Googles Android platform. Nokias reasoning behind going with WP over Android is that it felt that going with Android meant that it would one of many and that value was being moved from Nokia to Google.

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From the point of view of a Microsoft shareholder, the numbers certainly add up. Four years ago, before the financial crisis, Nokia was riding high, with a stock market value half as big as that of Microsoft. It has since lost 85 per cent of its value and, at $20bn, could easily be handled with Microsofts $52bn of cash reserves, even with a sizeable premium. The fact that 85 per cent of Microsofts cash is held outside the US only adds to the attractions, since with foreign acquisitions it avoids the tax hit that would come from repatriating the money. To complete the set, Microsoft could even think about throwing in the tax-free money to buy Canadian BlackBerry maker Research In Motion, valued at barely $8bn, which would further extend the footprint of its Windows Phone platform. Nokia itself has been strongly rumoured to have looked at a RIM acquisition, which might aid in its efforts to re-establish a presence in the US. However, Mr Elop played down the idea while visiting the Consumer Electronics Show in Las Vegas this week. Im not sure that it would, he said, before going on to point out that smaller acquisitions with less complexity to them were the ones that made the most sense in the tech world. For Microsoft, though, double-dipping with both Nokia and RIM may look like a quick way to become a smartphone leader if it could handle the angst that the loss of national tech champions would be likely to engender in both Finland and Canada.

Welcome to the Third Ecosystem: A new alliance is born

GLOBAL - A long term strategic alliance between Nokia and Microsoft builds a global ecosystem that creates opportunities beyond anything that currently exists. This ecosystem offers a serious alternative to the existing choices to operators, developers and consumers. Bringing together highly complementary assets and competencies will allow this ecosystem to achieve

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more than any other industry partnership could achieve. Welcome to the third ecosystem. Together Microsoft and Nokia have some of the most globally recognized and treasured brands on the planet. This can be leveraged for the benefit of the ecosystem and the products. Brands like Bing, Xbox, Office, Windows Phone and Nokia, would be all in one package. Nokia wouldnt be just be another Windows Phone OEM. Nokia plans to help drive and define the future of the platform. That could include contributing expertise on hardware optimization, language support, customization of the software and helping bring Windows Phone to a larger range of price points, market segments and geographies. Nokia operates an established, global supply and distribution network with the capability to bring products to almost every corner of the world. That provides the capability to take potential Nokia Windows Phone products and make them globally competitive. Scale is critical to a winning ecosystem. Together, Nokia and Microsoft would bring unrivalled scale in global reach, brand identity and product breadth. Now more than ever, consumers, developers and operators have more compelling choices in the mobile space. Its an exciting time.

THE FUTURE PROSPECT OF THIS ALLIANCE:

Nokia and Microsoft have entered into a non-binding term sheet. The planned partnership remains subject to negotiations and execution of the definitive agreements by the parties and there can be no assurances that the definitive agreements would be entered into. FORWARD-LOOKING STATEMENTS:
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It should be noted that certain statements herein which are not historical facts are forward-looking statements, including, without limitation, those regarding: A) the intention to form a strategic partnership with Microsoft to combine complementary assets and expertise to form a global mobile ecosystem and to adopt Windows Phone as our primary smartphone platform, including the expected plans and benefits of such partnership; B) The timing and expected benefits of our new strategy, including expected operational and financial benefits and targets as well as changes in leadership and operation structure; C) The timing of the deliveries of our products and services and their combinations; D) Our ability to develop, implement and commercialize new technologies, products and services and their combinations; E) Expectations regarding market developments and structural changes; F) Expectations and targets regarding our industry volumes, market share, prices, net sales and margins of products and services; G) Expectations and targets regarding our operational priorities and results of operations; H) The outcome of pending and threatened litigation; I) Expectations regarding the successful completion of acquisitions or restructurings on a timely basis and our ability to achieve the financial and operational targets set in connection with any such acquisition or restructuring; and J) Statements preceded by "believe," "expect," "anticipate," "foresee," "target," "estimate," "designed," "plans," "will" or similar expressions. These statements are based on management's best assumptions and beliefs in light of the information currently available to it. Because they involve risks and uncertainties, actual results may differ materially from the results that we currently expect. Factors that could cause these differences include, but are not limited to: 1) Whether definitive agreements can be entered into with Microsoft for the potential partnership in a timely manner, or at all, and on terms beneficial to us;

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2) Our ability to continue to innovate and maintain the vibrancy of our Symbian-based smartphones during the negotiation of the Microsoft partnership and thereafter; 3) The negotiation and implementation of the Microsoft partnership will require significant time, attention and resources of our senior management and others within the company potentially diverting their attention from other aspects of our business; 4) In choosing to negotiate a partnership with Microsoft and utilize Windows Phone as our primary smartphone platform, we may forego more competitive alternatives achieving greater acceptance and profitability in the smartphone market; 5) The Microsoft Windows Phone smartphone platform may not be preferred by application developers, content providers and other partners impairing our ability to build a sufficiently competitive ecosystem for our smart phones; 6) The Microsoft partnership may not achieve the stated goal of producing smart phones which are differentiated from those of our competitors and preferred by our customers and consumers in the expected timeframe, or at all; 7) Our ability to change our business model, way of working and culture sufficiently to work effectively and efficiently with Microsoft in order to realize the stated benefits of the partnership in a timely manner, or at all; 8) Our ability to effectively and smoothly implement our new leadership and operational structure and to realize the anticipated benefits in a timely manner; 9) The implementation of the Microsoft partnership and the new operational structure may cause disruption and dissatisfaction among employees potentially reducing focus and productivity in some or all areas of our business; as well as the Risk Factors."

ADVANTAGES AND DISADVANTAGES OF GLOBAL STRATEGIC ALLIANCE:

Advantages of the Global Strategic Alliance:

Get instant market access, or at least speed your entry into a new market.
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Exploit new opportunities to strengthen your position in a market where you already have a foothold. Increase sales. Gain new skills and technology. Develop new products at a profit. Share fixed costs and resources. Enlarge your distribution channels. Broaden your business and political contact base. Gain greater knowledge of international customs and culture. Enhance your image in the world marketplace.

Disadvantages of the Global Strategic Alliance:

Weaker management involvement or less equity stake. Fear of market insulation due to local partner's presence. Less efficient communication. Poor resource allocation. Difficult to keep objectives on target over time. Loss of control over such important issues as product quality, operating costs, employees, etc.

BENEFITS OF THE STRATEGIC ALLIANCE:

BENEFITS FOR NOKIA:

According to the New York Times, Nokia was offered hundreds of millions in engineering assistance and marketing support. Needless to say, Microsoft paid Nokia nicely.
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Nokia gets to pare down a bloated corporate structure. Nokia CEO Stephen Elop on Friday alluded to cost cutting, job retraining and layoffs ahead. Reuters notes that there may be thousands of layoffs ahead. With a pared down structure, Nokia can focus, become more streamlined and potentially get a cut of future ad revenue via Bing and location based services. Microsofts marketing budget can help Nokia break into the U.S. and open a new market. CNet News Stephen Shankland quotes Elop: We have different forms of value transfer in different directions. We have new opportunities that come from advertising and new forms of monetization. Its safe to say Nokia comes out ahead on the payment side of the equation. Its unclear what Nokia spent on software development, but this chart highlights how costs will be dropping dramatically. Nokia will ship Windows Phone 7 devices in volume in 2012 as Symbian is phased out, support costs will decline.

BENEFITS FOR MICROSOFT:

Microsoft gets distribution for its Windows Phone 7 OS. Its unclear what the licensing arrangement is between Nokia and Microsoft, which will collect undisclosed royalties. The software giant dents what could have been mobile domination by Google. Microsoft will get more developers on board due to Nokias global distribution. Note many of the benefits to Microsoft are intangible. Microsoft becomes a mobile player again, but as we know from the companys Internet efforts-profits can be elusive.

RISK OF THE STRATEGIC ALLIANCE:

The biggest risk to Nokia and Microsoft is the transition period. Nokia indicated a two year transition period to Windows Phone 7 devices. The smartphone market operates in dog years. Two years is an eternity and if consumers dont play ball with Nokia and Microsoft, both companies could become irrelevant.
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Nokias planned transition period to a Windows Phone smartphone OS world appears to be slow. Notably, Nokia did not announce a Windows Phone product. Interim plans for multi-OS support to add to cost burden during long path to market share recovery. Curiously, Nokia plans to proceed later in 2011 with the introduction of a smartphone based on Nokias MeeGo platform. Nokia also plans to continue to launch new Symbian-based devices, with plans to ship up to 150mn such devices. CEO Stephen Elop indicated that the agreement with Microsoft was non-exclusive and that 2011 and 2012 would both be transition years for Nokia. Nokia declined to provide clear guidance for 2011, citing uncertainty related to the OS transition. The one piece of financial guidance provided by Nokia was that they expected Devices and Services operating margins to return to greater than 10% following the transition period of 2011 and 2012. Implicitly, they are therefore guiding for margins to be below 10% in this year and next, which is below our current estimates of 11% and 13%. This assumes a steady deterioration in industry gross margins. Nokia currently posts 29% gross margins.

Bottom line: Nokia is in for a rough two years and when it emerges with Microsofts mobile OS its unclear what market share base it will be working from.

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