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Originally published September 3, 2013 at 9:18 PM | Page modified September 3, 2013 at 9:31 PM

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Microsoft, Nokia face ‘tough road’ in mobile market

Microsoft Chief Executive Steve Ballmer may have disrupted the status quo in the mobile market with his company’s blockbuster acquisition of Nokia, but the challenges Microsoft and Nokia face to succeed in the business are no less daunting.

Seattle Times technology reporter

About Nokia

Headquarters: Espoo, Finland

Employees: 88,000. Of that, 32,000 will transfer to Microsoft after the deal closes.

Founded: 1865, as a paper manufacturer.

Other businesses over the years: Rubber products, electricity provider.

Nokia Corp. established: 1967

First handheld phone launched: 1987

Microsoft connection: Former Microsoft executive Stephen Elop becomes Nokia CEO, September 2010

Windows Phone partnership with Microsoft: February 2011

First Nokia Lumia Windows phones: October 2011

Lumia phones sold last quarter: 7.4 million

Source: Nokia, Microsoft

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When Microsoft and Nokia announced Monday night that the software giant would be buying the Finnish phone company’s handset business, there was plenty of talk about win-win, improved efficiencies and shareholder value.

But come Tuesday, when the stock market opened and pundits started pontificating, it was clear from the mixed reactions that not everyone saw the $7.2 billion deal in glowing terms.

Microsoft Chief Executive Steve Ballmer, who is retiring within the next 12 months, may have disrupted the status quo in the mobile market with this blockbuster acquisition, but the challenges Microsoft and Nokia face to succeed in the business are no less daunting.

In Finland, some media reports expressed sadness over the loss of a substantial chunk of one of the nation’s leading companies and once the world’s dominant cellphone handset maker.

But Nokia investors reacted well to the news, sending the company’s share up 31 percent to close at $5.12 Tuesday.

Not so for Microsoft’s shares, which plunged 4.6 percent to close at $31.88 Tuesday.

Longtime Microsoft securities analyst Rick Sherlund of investment bank Nomura called the deal a “poke in the eye.”

“Microsoft is operating under the strategy that it needs to design devices along with its software to deliver competitive products,” Sherlund wrote in a note to investors. “This may be true, but so far the costs of being in the hardware business seem to be outweighing any near-term benefit, and Nokia is another step in this direction, with losses expected of about $1 billion this year.”

Others saw the situation as Redmond-based Microsoft having no other choice if it wanted a toehold in the mobile market — something that’s vital if its operating systems and services are to remain relevant in the future, especially as it competes with principal consumer-market rivals Apple and Google.

Currently, Microsoft’s Windows Phone operating system holds only about a 3.3 percent worldwide market share. Microsoft executives say the acquisition allows the company to move more aggressively, operate more efficiently, and market its products in a more focused way as it battles to increase its share.

“Is it the right move? I think it’s the best of the bad moves available,” said Michael Yoshikami, chief executive of money-management firm Destination Wealth Management.

“If Nokia were not in existence, I don’t see companies like Samsung or HTC” really stepping in to fill that void for Windows Phone, Yoshikami said. “I think it’s what Microsoft had to do. But it’s a very, very tough road they’ve signed on to.”

Microsoft purchased Nokia’s handset business as part of a $7.2 billion deal — $5 billion toward the purchase of Nokia’s Devices and Services Business and $2.18 billion toward licensing of Nokia’s patents and mapping services.

As part of the deal, expected to close in early 2014, pending regulatory approval, about 32,000 of Nokia’s current 88,000 employees will become Microsoft employees. Many of those employees work in Nokia’s manufacturing facilities in countries including Brazil, China, India and Mexico.

About 4,700 of the employees working in Finland in research and development, engineering, design and operations will remain there.

Analysts had mixed reactions to Microsoft taking on a significant number of Nokia’s employees.

“One can warm up to the possibility of greater share going forward, but it is hard to get over taking on this cost structure, including hiring an estimated 32,000 Nokia employees relative to Microsoft’s existing 99,000,” Sherlund wrote. “Adding to the cost structure when shareholders may be looking for steps in the other direction is not likely to be well received.”

Yet part of what Microsoft gets with the employees coming over is valuable knowledge — knowledge of the consumer and mobile markets, relationships with carriers, and strategies for reaching customers in emerging markets, said Carolina Milanesi, an analyst with research firm Gartner.

“There are a lot of people who say: ‘It hasn’t worked in the past 2½ years of being partners. Why is this going to be different now?’ ” Milanesi said of the partnership, begun in February 2011, between Microsoft and Nokia in which the Finnish company committed to using primarily Windows Phone for its smartphones.

“I think it is going to be different,” she said. “Nokia had been limited in how many products it could take to market at a given time. Some of those challenges are going away with Microsoft’s resources. And the relationship that comes from being in the same company changes things.”

Ballmer said in a conference call Tuesday morning that it was vital for the company to succeed with mobile devices.

“The device opportunity is perhaps the best opportunity for pursuing users in very, very large numbers,” he said.

And, he continued, being successful with users is “absolutely vital” to the company succeeding in the workplace and in the home.

Melding Nokia and Microsoft would allow the marketing of Windows Phone to be more focused, with one brand and one unified voice in the market, Ballmer said.

Will Stofega, an analyst with research firm IDC, said the deal shows how important it is these days to have an integrated platform, with hardware that works well with and shows off the capabilities of the software.

Combining the two companies into one should theoretically also make it easier for Microsoft to be more agile in making changes since it now will own manufacturing facilities and have supply-chain relationships that have been established.

“Minor changes in operating systems, in chipsets — tiny little things that go into these devices — can have broad impact on how the devices are formed,” Stofega said.

So if Microsoft changes something in its operating system, it should be easier to make subsequent hardware changes in its own manufacturing plants, rather than having to go through another company.

Microsoft also recognizes that Nokia has been successful in competing at the lower end in some emerging markets — something vital to future growth as the markets in the U.S. and Europe become saturated.

“Asia Pacific and the countries there are key to growth,” Stofega said. “If you don’t have a presence and capabilities there, you’re not going to go far.”

Still, huge challenges remain — among them how Nokia’s handset business will be integrated into a Microsoft that is itself in the midst of a massive reorganization.

“This is not going to be a sort of sudden ‘snap your fingers and everything works.’ It’s going to take some time and some investment,” Stofega said. “I think the thing investors don’t realize is that if Microsoft doesn’t do this, it’s going to be a tough future ahead because mobility — mobile computing — is critical.”

Janet I. Tu: 206-464-2272 or jtu@seattletimes.com. On Twitter @janettu.

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