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Originally published April 23, 2014 at 7:33 PM | Page modified April 24, 2014 at 1:11 PM

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Microsoft set to dive deep into hardware with Nokia deal

What does Microsoft’s $7.2 billion acquisition of Nokia’s handset business bring to the software giant? Start with 32,000 employees and $15 billion in sales, plus a key piece of Microsoft’s “mobile first, cloud first” strategy. The deal is expected to close Friday.


Seattle Times technology reporter

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When Microsoft reports its fiscal third-quarter earnings Thursday, one of the issues it will likely address in the conference call with analysts is its impending takeover of Nokia’s handset business.

Microsoft expects its $7.2 billion acquisition of Finland-based Nokia’s Devices & Services unit to close Friday, at which point the software giant will also become one of the world’s largest device manufacturers.

It’s a move fraught with risk, given that Microsoft has never been a handset vendor before, and will inherit about 32,000 Nokia employees in factories worldwide, along with supply-chain and other manufacturing challenges, and hardware profit margins that tend to be much slimmer than those for software.

The move may also hinder Microsoft’s efforts to get more hardware manufacturers to build Windows Phone handsets.

But the Nokia acquisition is also an opportunity for Microsoft to gain badly needed market share for its smartphones and tablets.

It’s also a key component in Microsoft’s longer-term strategy to become a “mobile first, cloud first” company, as new CEO Satya Nadella puts it, or a “devices and services” company, as coined by former CEO Steve Ballmer, under whom the Nokia purchase was made.

Nadella is expected to be on Thursday’s earnings conference call — his first doing so as CEO. Ballmer had taken part in such calls infrequently.

Even after several years on the market, Microsoft’s market share in mobile devices is still tiny. Its Windows Phone operating system represented only 3 percent of the smartphones sold worldwide in 2013, while its tablet sales held just 2 percent of that market, according to research firm Gartner.

The deal’s closing obviously isn’t going to automatically get more people to buy Windows Phones, said Tuong Nguyen, a Gartner analyst.

“This is part of their bigger, longer strategic plan,” he said.

Microsoft has had a difficult time getting vendors to produce Windows mobile devices; earlier this month it announced Windows would be free to manufacturers making devices with screens smaller than 9 inches.

“Obviously Microsoft was already challenged with getting other vendors to adopt [its mobile platforms],” Nguyen said. “This was an opportunity for them to take control of it and push it forward on their own.”

Microsoft and Nokia teamed up in February 2011, when Nokia announced it was making Windows Phone its primary smartphone operating system.

In the past, Nokia had used the Symbian platform as its OS of choice.

Nokia’s Lumia line of Windows Phone is responsible for 30 million of the 31 million Windows Phone handsets sold worldwide last year, according to Gartner.

Still, having to make decisions through two different chains of command led to less agility and efficiency.

“I don’t think they were able to achieve the synergies they wanted without bringing it in-house,” Nguyen said of Microsoft’s decision to purchase the company, which was announced last September.

The two companies had previously said that when the deal closes, about 32,000 of Nokia’s employees — most of whom work in the handset maker’s factories worldwide — will become Microsoft employees.

Stephen Elop, a former Microsoft executive who became Nokia’s CEO, will rejoin Microsoft after the deal closes. He will become head of Microsoft’s Devices Group.

Compared with its smartphone sales, Nokia has fared far better in selling basic mobile and feature phones — lower-end phones with less computing ability.

The Nokia brand, although eroded somewhat, still has strong consumer value in many developing countries, Nguyen said.

Last year, Nokia sold nearly 251 million handsets (including basic mobile, feature, and smartphones), second only to Samsung, which sold 444 million handsets, according to Gartner.

But Nokia’s sales of smartphones, specifically, puts it in eighth place among smartphone vendors, with 30 million units sold compared with 300 million sold by market leader Samsung, Gartner’s findings say.

In Thursday’s earning call, Nadella may address what the closing of the deal means for Microsoft’s bottom line, and for his overall “mobile first, cloud first” strategy, which emphasizes Microsoft’s cloud services running on a range of mobile devices.

Analysts expect Microsoft to report third-quarter revenue of about $20.4 billion, and earnings per share of 63 cents on profit of $5.3 billion, according to Bloomberg.

That’s down, respectively, 0.3 percent, 12.6 percent, and 13.2 percent from the year-ago quarter.

The earnings report will be released shortly after 1 p.m. The conference call, which will be webcast, will start at 2:30 p.m. at www.microsoft.com/investor.

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



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