Inside Business

January 11, 2012 9:11 pm

Nokia and Microsoft talk up co-dependence

Acquisition might be best hope for redemption for Steve Ballmer, says Richard Waters

The word that Nokia boss Stephen Elop uses to describe the close alliance with Microsoft on which he has bet his company’s future is a somewhat unfortunate one. He calls it a “co-dependency” – which conjures up images of unhealthy mutual reliance as the two also-rans in the smartphone business cling together for support.

A less-loaded description would be that tech industry catch-all, “convergence” – in this case, between Nokia’s hardware and Microsoft’s Windows Phone software. If there is a way back, then these companies are betting that it lies in tying the technology pieces together more closely – an idea that has been coming into vogue in the handset world, where Apple’s iPhone remains the shining example.

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Hanging over all this is the question of whether the dance between Microsoft and Nokia will end in the ultimate corporate convergence. One person close to Google’s board makes the case that the Finnish company is now “in play” and that an acquisition is the best hope for redemption for Microsoft boss Steve Ballmer. Mr Elop also needs redemption: In the 16 months since he took the reins, Nokia’s already-battered shares have lost another 47 per cent of their value.

Google is, of course, contemplating a degree of smartphone convergence of its own. Its acquisition of Motorola Mobility, which is still awaiting regulatory approval, is intended mainly to bring it the portfolio of patents it needs to fend off lawsuits. But with the hardware business that comes along with it, the search company will also have bought itself some optionality, should it eventually decide it needs a true Google Phone.

The close alliance with Nokia also gives Microsoft an option. But whether a full acquisition would help in the fight with Apple and Google is debatable.

From the point of view of a Microsoft shareholder, the numbers certainly add up. Four years ago, before the financial crisis, Nokia was riding high, with a stock market value half as big as that of Microsoft. It has since lost 85 per cent of its value and, at $20bn, could easily be handled with Microsoft’s $52bn of cash reserves, even with a sizeable premium.

The fact that 85 per cent of Microsoft’s cash is held outside the US only adds to the attractions, since with foreign acquisitions it avoids the tax hit that would come from repatriating the money. To complete the set, Microsoft could even think about throwing in the tax-free money to buy Canadian BlackBerry maker Research In Motion, valued at barely $8bn, which would further extend the footprint of its Windows Phone platform.

Nokia itself has been strongly rumoured to have looked at a RIM acquisition, which might aid in its efforts to re-establish a presence in the US. However, Mr Elop played down the idea while visiting the Consumer Electronics Show in Las Vegas this week. “I’m not sure that it would,” he said, before going on to point out that smaller acquisitions with less complexity to them were the ones that made the most sense in the tech world.

For Microsoft, though, double-dipping with both Nokia and RIM may look like a quick way to become a smartphone leader – if it could handle the angst that the loss of national tech champions would be likely to engender in both Finland and Canada.

But is the tight technology convergence on which a Nokia acquisition would be predicated really answer both companies’ smartphone woes?

Microsoft has tried the hardware-software combination before. Its Zune player, launched years late against the iPod, was meant to prove that there was a gadget gene embedded in its DNA. Despite good reviews, it flopped.

It is not even clear that close integration of hardware and software is the secret to world domination in smartphones, much as Microsoft and Nokia like to argue the case. The leader in smartphone operating systems is Google’s Android, which has given birth to an array of devices of varying quality. Google has worked closely with hardware makers for the flagship Nexus phones it launches each year – much as Microsoft works with Nokia – but they have not been among the biggest Android successes. So either consumers don’t yet appreciate the extra benefits claimed for integrated devices, or the real downside of fragmentation in the Android ecosystem has yet to reach a critical stage, says Joe Belfiore, who heads product and software design for Windows Phone.

Neither outcome is preordained. Mobile carriers and hardware makers like the extra freedom they get from Android and continue to promote it heavily.

In Las Vegas this week, meanwhile, Nokia and Microsoft were talking up the Lumia 900, a new device they hope will reignite interest among US smartphone users. If it works, the odds will increase on their co-dependency eventually becoming a bond for life.

richard.waters@ft.com

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