Nokia appears free to return as an Android or Windows Phone maker in 2016

With the final regulatory approvals secured, and with details of factory transfers and other sticking points finally ironed out, Microsoft Corp. (MSFT) announced late Thursday that it had completed the acquisition of Nokia Oyj.'s (HEX:NOK1V) devices unit.  

I. Let's Make a Deal

Nokia Oyj. -- based out of Finland -- served Microsoft loyally as the primary champion of Windows Phone.

The relationship was fraught with controversy from Microsoft's payments to Nokia to the role of former Microsoft business division head Stephen Andrew Elop, who had been appointed CEO of Nokia.  Some felt Nokia would have been better served becoming yet another in the growing pack of Android phonemakers. Others argued that despite the low sales Nokia successfully downsized, returning to profitability and producing truly differentiated offerings with the Lumia handset line.

Ultimately, Microsoft decided that the best option in order to make sure Nokia Devices stayed onboard with Windows Phone and to quell cries that Stephen Elop was a "Trojan horse" was to simply buy the unit from Nokia Oyj.  On Sept. 3, 2013 Microsoft announced that it was acquiring Nokia Devices for €3.79B ($5.24B USD) and licensing Nokia's patents and software services (e.g. HERE maps) for €1.65B ($2.28B USD), in a deal initially worth $7.2B USD.  Adjusting for current exchange rates, the deal at its close was worth just slightly more -- around $7.5B USD.

Microsoft new sign
[Image Source: Bloomberg]

Microsoft paid for the deal largely in cash, which it had been sheltering overseas in low-tax regions like Ireland and the Bahamas.  It wrote back in Sept. 2013:

Microsoft will draw upon its overseas cash resources to fund the transaction. The transaction is expected to close in the first quarter of 2014, subject to approval by Nokia’s shareholders, regulatory approvals and other closing conditions.

The deal was quickly cleared by shareholders in Nov. 2013, and scored U.S. and EU regulatory approval by Jan. 2013.  Approval in China was the final roadblock recently cleared by Nokia and Microsoft, which allowed the deal to complete.
Nokia sign
[Image Source: Reuters]

In the end the transaction took a month longer than hoped, but 8 months really wasn't that bad a turnaround, given the thorny competitive issues and global trade issues on the table.

The decision will likely long be remembered as one of Microsoft's second CEO -- Steve Ballmer's -- final and most critical decisions.

II. Microsoft's Shiny New Hardware

With the deal now closed Microsoft will gain control of one of the world's biggest feature phone lines, which includes the Asha smartphones -- a phone family that has sold over 1 billion units globally to date.  Asha and most of Nokia's other feature phone families run on variants of the aging Symbian operating system, such as the S40.  
Nokia Asha 230
Microsoft's low end is comprised with Symbian smartphones in the Asha line.  Microsoft may look to slowly phase that out for reskinned Android devices to avoid having to continue to develop the proprietary S40/S60 operating systems.

Microsoft also will be left to develop the role for Nokia's recently launched mid-range Nokia X, an Android offering that's reskinned to look and feel like Windows Phone.  It's probable that Nokia X will slowly replace the Asha line as budget smartphones.
Nokia X screens
Microsoft will likely continue to sell the Nokia X, a reskinned Android smartphone to the budget smartphone market.

On the high-end will be the Lumia brand, which exclusively runs pure Windows Phone.
Lumia 930
The Nokia Lumia 930

Microsoft is continuing to court third-party OEMs to the Windows Phone platform with its latest greatest Windows Phone 8.1.  Notably it waived licensing fees for Windows Phone, giving it a key leg up over Google Inc.'s (GOOG) Android (which is also free, but will invariably lead to you being forced to pay licensing fees to Microsoft for features found in Android that are seemingly covered by Microsoft's large software patent portfolio).

The decision to give away Windows Phone for free is very recent.  Even before that some OEMs were expressing interest at Microsoft's very low prior licensing rates, which may have in some cases been cheaper than Android licensing fees.  While it remains to be seen how much OEMs really commit to Windows Phone volume wise, the decision could be a game changer, ensuring Microsoft Devices isn't going it alone with its first party products.

For now Nokia devices will continue to sell under their familiar brand names, as Microsoft gained the rights to both the brand names and even the name "Nokia" itself as part of the deal.  Nokia's employees -- 34,000 of which will be inherited by Microsoft -- will largely stay where they are, doing what they're doing.  But Microsoft will look to streamline the device unit's overally strategy to further its Windows Phone vision, and offer tighter integration than the devices unit had enjoyed when it was under the umbrella of a separate company.

Mr. Elop will answer to new Microsoft CEO Satya Nadella, the man who beat him in the competition to replace Mr. Ballmer to become the next CEO.  

Satya and Stephen
Microsoft CEO Satya Nadella (L) and Devices EVP Stephen Elop discuss products.

While they served as rivals during the CEO search, the pair appear to have a good working friendship in the aftermath of the Mr. Nadella's victory.  Both men share a common vision of the importance of mobility and the cloud to Microsoft's long-term goals.

In an open Mr. Elop writes to customers, investors, and the public in general, commenting:

Six months ago, we announced our plans to bring the best of Microsoft and Nokia Devices and Services business together. Today is an exciting day as we join the Microsoft family, and take the first, yet important, step in our long-term journey.

At our core, we are passionate about building technology that will change the world. From the early vision of Microsoft of placing a PC in every home and on every desk, to Nokia connecting billions of people through mobile devices, we have empowered generations. But we could not have achieved any of this without our fans around the world.

Your support has created strong momentum for Nokia Lumia smartphones and they continue to grow in popularity around the world. Last year alone, the awards, accolades and fan-generated rave reviews offered proof of the growing number of champions for our phones and tablets.

And we are committed to continuing our support for feature phones, the Asha family, and the Nokia X family of devices, announced at the Mobile World Congress in February.

Whether you want to read more, capture more, watch more, listen more or get more done, Nokia mobile devices have been and are your go-to choice.

As Microsoft and Nokia Devices and Services come together as an expanded family, we will unify our passion, dedication and commitment to bringing you the best of what our joint technologies have to offer.

Together, we can connect and empower people with one experience for everything in their life in a world where it is mobile first and cloud first.

The Xbox, Surface tablets, PC accessories (mice, keyboards, etc.), and Perceptive Pixel  (PPI) products will also be under Stephen Elop's command.  Basically almost anything you see in a Microsoft Store in terms of hardware will be driven by the unit led by Mr. Elop.

III. Nokia Could Return as Android OEM in 2016

Nokia, meanwhile gains $7.2B USD in cash and for now exits the device space.  

It will continue to draw revenue from patent licensing deals with Android phonemakers and Apple, Inc. (AAPL), and it retains control of the advanced technologies team that tinkers with novel smartphone technologies.  The cash will immediately be put to use in paying off the  €1.7B ($2.34B USD) cost of Nokia's buyout of Siemens AG's (ETR:SIE) share in Nokia Solutions and Networks (NSN).  NSN -- a top player in the telecom equipment market -- will now be Nokia's chief breadwinner, in terms of revenue.

Nokia Siemens
Nokia Solutions Network (NSN) is now solely owned by Nokia. [Image Source: Telegraph]

Currently one of the biggest controversies and risks to Nokia lies in licensing rates.  Given that Nokia has the mobile industry's most formidable patent portfolio which is not encumbered by mandatory licensing, Nokia has long been free to name its own inflated licensing rates.  Rivals have little choice but to comply as Nokia has generally shown its portfolio capable of scoring sales bans on virtually any smartphone in a variety of jurisdictions.  

But with the deal to Microsoft, Nokia is technically out of the phonemaking business, so it's facing concern that it will now be essentially acting as a non-practicing entity (NPE) or the less euphamistic equivalent -- a patent troll.  As a result Nokia likely had to agree to limit the license rates to certain Android OEMs to avoid abusing it dominant position.

An under examined aspect of the deal was a line item that Nokia revealed earlier this year:

Upon the closing of the transaction, Nokia would be restricted from licensing the Nokia brand for use in connection with mobile device sales for 30 months and from using the Nokia brand on Nokia's own mobile devices until December 31, 2015.

Hence while Nokia will for now focus on its global communications network hardware offerings, its licensing deals, and its software services such as HERE, it could make a return to the smartphone market in 2016.  This creates the fascinating possibility that both Microsoft and Nokia could peddle products with different features but identical brand names ("Nokia") for as long as eight years of Microsoft's ten year licensing pact.

Lumia Android mockup
Nokia is allowed to reenter the phone market as an Android or Windows Phone device maker in 2016. [Image Source: Digital Trends]

In reality that may never happen.  While Nokia has a massive financial advantage when it comes to licensing, it would face a crucial production and design deficit now that most of its production and smartphone engineering employees have transferred to Microsoft.  Nokia would have to painstakingly rebuild its team.  While it may yet do that, suffice it to say that's not as easy as it sounds.

No one knows if Nokia is plotting such an approach, but it would not be surprising to see Nokia make a bold comeback in 2016 as an Android OEM, given its built in licensing advantage over fellow Android rivals (and cross-licensing deals with Apple and Microsoft).  An Android rival might be stuck paying $15-40 USD per device to Microsoft, Nokia, and Apple.  By contrast Nokia would pay no licensing fees for its Androids, and would actually receive money for every rival Android device or iPhone sold.

Sources: Microsoft [press release], Nokia [Stephen Elop, open letter]

"We don't know how to make a $500 computer that's not a piece of junk." -- Apple CEO Steve Jobs

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