Is Windows Phone killing Nokia?

Nokia bet the farm on Windows Phone when it made a long-range deal with Microsoft to focus on the smartphone operating system. Today's announcement by Nokia saying it would cut nearly 20 percent of its workforce, close research centers, and jettison several top executives makes it appear that the bet didn't pay off.

Nokia said that it lost $1.2 billion in the first quarter, with sales falling a precipitous 29 percent. In making the announcement, Nokia said that it expected even worse to come, largely as a result of its Windows Phone deal with Microsoft. The New York Times reports:

The company also warned investors that its loss was likely to be greater in the second quarter, which ends June 30, than it was in the first, and that the negative effects of its transition to a Windows-based smartphone business would continue into the third quarter.

The Times also noted that since Nokia signed the deal with Microsoft in 2011:

...the Finnish company has seen its sales fall and profit evaporate as consumers and operators have avoided, or demanded discounts on, smartphones running Nokia's in-house Symbian operating system, which the company is phasing out. Although Lumia devices have won critical praise, sales have not been strong enough to offset declines in its main business.

The Times quotes Canalys analyst Pete Cunningham saying that Windows Phone has been a drag on the company:

"Nokia is having to work very hard to make its Lumia handsets attractive due to the lack of traction that Windows Phone has in the market today."

Given the sea of red ink, I don't think it's likely that Nokia will survive on its own. The most likely buyer is Microsoft. Late last year Microsoft considered buying the company, but after a look at its books, backed off. But things have changed since then. Without Nokia, Windows Phone can't survive, and so Microsoft may be forced to prop up the company by buying it.

Buying Nokia today will be much cheaper than it was late last year. The stock has been trading under $3, a 15-year low. In late November 2011 it was as high as $7.38, and for most of December it was over $6. So Microsoft can buy it at bargain prices compared to back then. In fact, the Times notes, Nokia stock has dropped 75 percent since Microsoft and Nokia announced their Windows Phone deal last year. So Microsoft buying Nokia would be quite an irony: The relationship may have driven down Nokia's acquisition cost so much that Microsoft can scoop it up at a bargain price.

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