The acquisition converts to about 7 billion dollars in value, but Nokia and Microsoft were already close partners. What benefits does Microsoft gain from turning an alliance into an acquisition?
Money incentives seems like a good place to start. With Nokia as a licensee, Microsoft earned $10 gross per phone sale. Estimates on Nokia’s average gross margin sit in the $40 range. This means Lumia sales will now bring in around $50 gross profit for Microsoft, rather than $10.
However, as Lumia sales make up the vast majority of the Windows Phone portfolio anyway, effectively Microsoft is increasing the returns on Windows Phone overall by five times because of the acquisition.
Looking at the buyout terms more closely, Microsoft will pay about $2 billion just for Nokia’s intellectual property. Although the rate of high-profile patent disputes seems to have died down, expanding your patent portfolio tends to be cost-effective. Nokia’s design patents will probably assist in Microsoft’s plans for a Surface Phone as well. When looking at the “$7 billion dollar acquisition” headlines, it is important to remember that a third of that cost is in intellectual property.
In terms of future outlook, I think the Nokia acquisition only pays for itself if the incorporation into Microsoft’s monstrous corporate structure is handled well. With Nokia already a primary partner, deep integration of Nokia’s talent into Microsoft is required to make the purchase make financial sense. Annexing Nokia, in a similar vein to how Google has handled Motorola, would be a waste of resources; it would offer no additional benefit over the close partnership the two companies already had.
Finally, did $5 billion dollars just get Microsoft a competent CEO? That is the big question. This is currently all speculation and no fact, but the proximate timing of Ballmer’s departure and the buyout is hard to accept as as a coincidence.