Was Nokia worth it to Microsoft?

Was Microsoft's acquisition of struggling smartphone maker Nokia worth the cost?

Microsoft's recent quarterly results paint a fairly bleak picture of its acquisition of Finnish smartphone maker Nokia, one of the last major strategic moves of former CEO Steve Ballmer. When the acquisition was made, many saw it as an effort to keep up with smartphone titans Apple and Google. Apple has always manufactured its own hardware in-house, and Google's various hardware partnerships to produce flagship "Nexus" devices culminated in its acquisition of Motorola Mobility. Even pioneer BlackBerrry refused to let go of its hardware business, making a valid case for the need to guide a smartphone platform not only through the OS, but on the hardware front as well.

"Me too" or strategic move?

With all its competitors exerting direct influence over their respective platforms, acquiring Nokia seemed to make sense, particularly for Microsoft. The company's revived interest in smartphones with the release of Windows Phone failed to resonate with vendors, and before Nokia bet the proverbial ranch on the platform, most Windows-based smartphones were slightly modified versions of existing Android units. Nokia's transition to Windows as its primary smartphone platform created some momentum for the platform, but has made little more than a dent in Android and iOS smartphone sales.

Over a year after the acquisition, the landscape has changed, with BlackBerry a non-factor, and Google selling Motorola Mobility to Lenovo, largely returning to producing the software and relying on third parties to produce hardware. The market seems to have moved on from internal hardware, making Microsoft's acquisition look shortsighted, especially in light of recent layoffs, culled primarily from former Nokia employees.

However, without Nokia, Windows Phone would likely be in even worse shape. While no longer the mobility titan it was in the 1990s, Nokia remains a respected brand, and some of the innovations it brought to Windows Phone renewed interest in a platform that was struggling to gain market share. Unfortunately for both companies, this symbiotic relationship seems to have turned into one of dependency. Lackluster Windows Phone sales did little to revive a flagging Nokia, and rather than watching its primary hardware partner fail, acquiring the Nokia brand, knowledge capital, and dominant position in the small market for Windows Phone may have been Microsoft's only choice.

Far more than a blow to a landmark Finnish company, allowing Nokia to fail would be seen as a verdict on Windows Phone itself. Not only would this damage the image of Windows Phone, but also eliminate the only true innovator producing phones for the platform. While Microsoft surely could have negotiated a model or two out of HTC or another hardware partner, it would likely end up with another half-hearted repurposed Android phone. You can argue whether the Nokia acquisition is ultimately a success or failure, but to some extent it may have been the only viable option for the long-term viability of Windows Phone as a platform.

A post-Nokia era?

Another potential scenario for Nokia is that its assets are rolled into Microsoft's fledgling hardware unit. Microsoft has hit some partial success on this front, with the well-designed Surface series of tablets garnering respectable reviews and continuing to evolve into a unique competitor to the sea of Android tablets and iPads. However, wiping the Nokia brand from the face of the map would dilute Microsoft's investment in the company. While struggling, the Nokia brand still earns the respect of consumers, particularly outside the US. Offering hardware under a different brand also allows Microsoft to recast its image as a boring "enterprise" company without alienating its corporate base. Produce the innovative and consumer-oriented devices under the Nokia brand, while leveraging the same technology, people, and supply chain to create more enterprise-oriented devices under the Microsoft brand, and you can theoretically have the best of both worlds.

At the current time, Nokia looks like a poorly planned acquisition based solely on the numbers, and a last vestige of the often-maligned Ballmer era. However, despite limited strategic upside, it may have been the best possible move for the long-term success of Windows Phone. While Apple and Google seem entrenched and immovable in the smartphone market, it wasn't that long ago that companies like Nokia, Microsoft, and BlackBerry ruled the market. If nothing else, acquiring Nokia kept the possibility of Windows returning to smartphone dominance alive.