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On the defensive, Microsoft's hand was forced in Nokia deal

No choice but to rescue Finnish phone maker, or see Windows Phone homeless

September 6, 2013 04:18 PM ET

Computerworld - Microsoft's acquisition of Nokia was a defensive move to keep the Finnish phone maker from going under or falling into the hands of an Android-first rival, several analysts argued this week.

"Had Nokia abandoned Windows Phone, then Windows Phone would be dead," said Ben Thompson, an industry observer and independent analyst who writes on his Stratechery.com website.

Thompson was one of several analysts who read between the lines of the Nokia deal and concluded that Microsoft's hand was forced.

On Tuesday, Microsoft announced it will pay €3.79 billion ($5 billion) for "substantially all" of Nokia's Devices & Services business and €1.65 billion ($2.17 billion) to license Nokia's patents.

Also included in the deal was a credit line of €1.5 billion ($2 billion) that Microsoft will extend to Nokia in the form of convertible bonds that the latter can issue in €500 million ($658 million) chunks.

That Microsoft-funded financing was the clue Thompson seized on.

"Nokia was either going to switch to Android or was on the verge of going bankrupt. I suspect the latter," said Thompson, pointing to the $2 billion in instant credit.

Nokia was virtually the only smartphone vendor committed to Microsoft's Windows Phone operating system, a move it made after Stephen Elop, previously a Microsoft executive, was named CEO of Nokia in 2010. Other handset manufacturers, including leader Samsung, had either given Windows Phone only lukewarm support at best, or had completely ignored the OS to focus on Android.

"Microsoft felt they didn't have a choice," said Thompson. It had to buy Nokia before someone else did, and either shuttered its handset production or converted its devices into another slice of the enormous Android pie.

According to research firm IDC, Android-based smartphones will represent 75% of those shipped worldwide this year, while Apple's iOS will account for 17% and Windows Phone will come in a distant third at 4%.

Other analysts saw the Nokia acquisition in similar terms.

"Microsoft announced that it was providing Nokia with €1.5 billion in 'unconditional' financing, which means that Nokia was in significant financial distress," said Sameer Singh, a mobile technologies analyst who runs Tech-Thoughts.net. "If they couldn't reach a deal with Microsoft, they would have to sell to another company at a far lower valuation or consider bankruptcy."



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