Tuesday, September 3, 2013

Watching Microsoft's Death Spiral #6 (Nokia)

Well Microsoft hit the accelerator pedal on it's death spiral today.
Earlier death spiral posts: [#1#2#3#4#5]

Microsoft announced it is buying Nokia's Device & Services Business (plus some patents) for 7.1 billion dollars. Essentially, this is Nokia's handset business.
The bulk of this post is from a comment I made on Mary Jo Foley's "All About Microsoft" blog on ZDNet. MJF wrote an article asking: Does its Nokia buy thwart or fuel a possible Microsoft break-up?

My response (lightly edited, with added references) was:

Regardless of a break up, the Nokia deal will destroy Microsoft.


Nokia was likely to die in a year or so:
Computing Compendium: Nokia May Die, Taking Windows Phone 8 With It

From Nokia's standpoint any deal is a good deal because they were nearing the end of the cash they needed to continue to make competitive phones in a quickly changing market. (They have 4 billion euros in cash, but 2 billion has to be used for debt in 2/14 and they are burning through more that 500 million euros a quarter in losses.)

However, the biggest problem Nokia faces is that consumers really are not interested in WP8. Nokia had to make better phones at cheaper prices to overcome WP8's drag. As an independent company Nokia could have added Android into the mix. Then the good R&D Nokia was doing for phones could have been used for both platforms. The person responsible for Nokia's bad decision to limit themselves to WP8, Steven Elop, will be the head of Microsoft's device efforts.

Microsoft is pathetic at hardware. It's most famous line, the Xbox, has never (in a long term sense) made money. The Xbox One is a disaster before it even ships. The Surface line was soundly rejected by the market despite Microsoft spending ridiculous amounts of money promoting it. And now they are putting Steven Elop in charge of devices. This is a man who decided Nokia will make a Windows RT tablet after it was clear they were failing to sell. And don't forget the Kin and Zune failures.

So Ballmer, a lame-duck CEO, has just wasted 7+ billion on a devices strategy that he full well knows most shareholders do not favor. Because these new devices will now run only WP8, they are unlikely to have significant market share... meaning they will be another Xbox/Bing-like drain on the company. This will only lead to more shareholder dissatisfaction.

Microsoft has convinced itself that OEMs are the problem. It is clear to people that don't drink the Microsoft kool-aid daily that Windows 8 is the problem. Consumers and businesses have clearly rejected WP8 and Windows 8. Microsoft has no significant mobile presence, despite spending billions trying to acquire it.

I consider the Nokia purchase a sign that Microsoft is truly out of control. The answer to their wasted billions on the Surface and Xbox lines is not to double down and spend 7+ billion on a phone handset firm that is already known not to be profitable.

What's next, buy Dell and make their own desktops and laptops?

If you were an OEM, how much time would you put into Windows 8/WP8 after today's announcement?

If you asked me yesterday if thought Microsoft was dying, I would say yes, at least for consumers and small businesses, but that it would be slow. Today I'm not so sure it will be slow. Nor am I sure it will be limited to consumers and small business. OEMs were just put on notice that they have no future with Microsoft. OEM's are already behind Linux on servers... this might just make them consider it for desktops and laptops. They have already been switching to Android for tablets and phones.

-- End of Comment --

Apparently I'm right about how shareholders will feel, Microsoft stock is currently down about 6%.

In doing this acquisition, Microsoft undoubtedly upset activist investor ValueAct. They recently made a deal with Microsoft, giving them a seat on the board, come November. ValueAct (like many, probably most Microsoft shareholders) is unhappy about Microsoft's devices and services "strategy". See this MJF article for more information, I'm all over the comments on that article.

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