Did Nokia blackmail Microsoft into a sale by threatening to abandon Windows Phone?

There are plenty of theories about why Microsoft is buying Nokia, but two analysts say that the real reason was that Nokia was soon going to end manufacturing Windows Phones. Are they on target, or completely off base?

In the $7 billion cash purchase, Microsoft is buying Nokia's Devices & Services division. That division includes both the smartphone and mobile phones businesses. As part of the deal, Microsoft is also licensing Nokia's patents.

Nokia CEO Stephen Elop becomes a Microsoft employee again as executive vice president of Nokia's Devices and Services division. Many people view him as having an inside track to taking over as CEO when Steve Ballmer leaves within a year.

The two companies have been meeting for quite some time about a possible purchase, and there are plenty reasons that the deal makes sense. But two analysts say the real reason was that without the buyout, Nokia was going to stop making Windows Phone devices, notes Business Insider. Business Insider reports that "Two analysts, Ben Thompson of Stratechary and Benedict Evans, assume that Microsoft had to buy Nokia because Nokia was going to stop making Windows Phones very soon."

Thompson is no fan of the deal. He writes in his blog, "It is a deal that makes no sense." He goes on to say:

"I theorize that Nokia was either going to switch to Android or was on the verge of going bankrupt. (I suspect the latter: part of the deal included €1.5 billion in financing available to Nokia immediately, and the fact Microsoft had to take Asha but not the brand or maps suggests they were trying to keep the price as low as possible). And, had Nokia abandoned Windows Phone, then Windows Phone would be dead.

Windows Phone has already been largely abandoned by other OEMs; Samsung and HTC make warmed-over versions of 6-month old Android hardware, and that's really about it. Of course that will now stop, Microsoft’s protestations to the contrary, but regardless, without Nokia it would be over.

Evans has a similar argument. In his blog, he says:

"...the acquisition solves Nokia's problem (running out of cash) and hence is a tactical move by Microsoft: it prevents the only significant Windows Phone OEM from exiting the market. It is possible that Nokia threatened to switch to Android otherwise (the relevant contracts are getting close to renewal), rather as Motorola threatened to sue other Android OEMs before Google bought it."

Both analysts are certainly right about one thing: If Nokia stopped making Windows Phone devices, Windows Phone couldn't survive. The newest figures from AdDuplex show that Nokia has 87% of Windows Phone 8 market share worldwide, with HTC at 10%, Samsung at 2%, and Huawei at 1%. Nokia has nine of the top ten Windows Phone devices worldwide. Samsung has been making noises about possibly getting serious about Windows Phone, but that's far from a foregone conclusion. And given the success of Samsung's Android strategy, it's not likely Samsung would have spent enormous amounts of money on Windows Phone.

I think that in the long run, the analysts are right about Microsoft having to buy Nokia, because otherwise the company might stop making Windows Phones. Nokia interim CEO Risto Siilasmaa nearly said as much in a press conference at Nokia's headquarters in Finland. CNet reports that he said:

"It's evident Nokia doesn't have the resources to fund the required acceleration across mobile phones and smart devices. Nokia has done great work, however, the industry is becoming a duopoly with the leaders building significant momentum at a scale not seen before."

In other words, Nokia simply didn't expect to have enough cash in the long run to prop up its Windows Phone efforts. And without Nokia, Windows Phone goes away.

No actual blackmail was involved, but none was needed. The numbers are the numbers, and Microsoft can read balance sheets. It made the deal because without it, there was a reasonable chance that over the long term, Nokia couldn't fund its Windows Phone efforts.

Copyright © 2013 IDG Communications, Inc.

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