Microsoft and Nokia have been trying since January to find a better way of working together on Windows Phone.
That turned out to be Microsoft buying Nokia's handset business and bringing back Stephen Elop to head up not just the Windows Phone hardware team but Microsoft's whole devices business – which is a key part of the 'One Microsoft' reorganisation.
Although Nokia has negotiated an excellent deal, with a combination of cash up front, loans from Microsoft that it gets even if the deal falls through and ongoing licence fees for both its Here maps and the large number of patents it isn't selling to Microsoft, it's also giving Microsoft the skills it needs to make the reorganisation work – with few drawbacks.
The most obvious disadvantage that could have blocked the deal has already happened; Nokia's success in selling Windows Phone was discouraging other OEMs, interim Nokia CEO Risto Siilasmaa admitted in the press conference.
Microsoft still believes that making Windows Phone more successful with its own phones makes it more attractive to OEMs (and Steve Ballmer claims that "OEMs are more enthusiastic about Windows Pone today than they were yesterday", but it wants to be a successful hardware maker itself.
Nokia sells over 80% of all Windows Phones at the moment; that's better than the 50% of Windows tablets Microsoft wants to sell itself. And Microsoft gets technology for far more than phones: Terry Myerson has already teased us with the idea of combining the Lumia 1020 camera with the Kinect 2 sensor.
Is Elop the next man for Microsoft?
There's plenty of speculation that this is Microsoft buying its next CEO, but that's not what this deal is about. For one thing, Microsoft needs Elop to run the devices business if it's going to make a success of selling its own phones, tablets and the "new form factors" hinted at in the Microsoft presentation. For another, it's buying a lot more than one person.
Devices and services, as outgoing CEO Steve Ballmer has been saying for over a year now, are Microsoft's future, and that's a combination that Nokia is already good at. The Lumia handsets, both premium and budget, and the big-selling Asha phones are complemented by services from HERE maps, navigation tools, Nokia's extensive music service, dozens of utilities – including Nokia's own data-saving Xpress web browser and augmented reality tools.
Nokia has been running an app store for a lot longer than Microsoft and it has its own developer evangelism team, which has been at least as successful as Microsoft at bringing key apps to Windows Phone; Angry Birds, Words with Friends, Draw Something, Hipstamatic and other important apps have come to Nokia phones as exclusives months before other Windows Phone users got them.
When he ran the business division at Microsoft (which included Office), Elop was an early convert to the principle that grew into the devices and services mantra. Software plus services as Microsoft used to call it – apps that worked well on their own (like Outlook) but got better when you were online with access to extra services (like contact information from Linked In or Facebook). Back in 2009 at the Web 2.0 conference, he was bullish on the importance of the combination of devices, apps and cloud services.
"Some people say it will all be in the cloud; I think that is hogwash," he claimed (and the less-than-stellar sales of Chromebooks suggest he wasn't wrong). "How many people here have an iPhone? And how many of you are using the Facebook app on iPhone? Just as many. The device, the operating system, and the rich app – that's the Facebook app combined with the Facebook service - is a better experience."
That's as good a definition of the promise of devices and services as Microsoft has ever given, and it's something Nokia has been doing itself – especially with Here Maps and Lumia handsets.
Elop also has experience of the way Microsoft can improve in one area by learning from its own products in other areas; something that's key to making the 'one Microsoft' reorg succeed. Again, in 2009, he pointed out that "Xbox is cool but when you play around it there is all sorts of stuff you learn from it – and what we learn from enterprise search transfers to the Live team."
Microsoft had bought FAST to improve SharePoint search (both part of Elop's division) but the same expertise turned the disappointing Live Search into the much more effective Bing search engine.
What Microsoft must do next
Microsoft needs to do much more of that transfer between teams – and it needs to keep moving away from its tendency to Redmond insularity. Both companies have spoken in the past about how well their design ethos and ambitions match up and the Windows Phone tem has managed to work well with the Nokia teams in Finland.
Unlike Microsoft, which builds every service for the US first and the rest of the world much later, Nokia is hardly a US-centric company; it's used to building services for other countries around the world – the countries where Windows Phone is actually selling. Bing Maps is very accurate in the US but try searching for businesses in London using Bing Maps and Here Maps on Windows Phone; Nokia has a far better database of locations and you're much more likely to find what you're looking for.
The 30,000 Nokia employees who become Microsoft employees won't be moving to Redmond; they'll stay in Finland where they design the phones and in Silicon Valley where Nokia has its research labs – and in the production facilities around the world where they build phones.
Using Nokia's expertise to sell other devices
Nokia has decades of experience in building phones – and in running a supply chain that sources components, builds things like the image stabilisation modules that make the cameras in the Lumia 920, 925 and 1020 so good, manufactures the devices and then gets them into stores.
Microsoft has spent a lot of money building up its own supply chain for building the Surface tablets, but it was slow to make devices available outside the US; Nokia has that scale already. It's also used to working on multiple devices at once; Microsoft didn't have a large enough team to design Surface and Surface Pro at the same time, let alone get a smaller tablet ready to compete with the iPad Mini and Nexus 7.
To compete in devices Microsoft needs to move faster; having one division rather than two separate companies should help there. It also needs to learn to sell products better and get marketing working better with the product teams.
Nokia still has strong relationships with mobile operators around the world, a sales team that Microsoft doesn't have – and far better marketing. From genuinely funny ads like the wedding fight to guerrilla campaigns like paring ad vans next to Samsung billboards, Nokia can teach Microsoft to sell its products.
Can Microsoft really save money over the deal?
Microsoft says it will also save money, not just from the extra efficiency and scale but also from the 60-plus patent licenses from companies like IBM and Motorola Nokia is handing over, which have what Microsoft calls "attractive royalty arrangements" – and Microsoft can use them for tablets and other devices as well as phones.
Plus the deal means Google-owned Motorola can't sue Microsoft over smartphones in future for any of those patents; neither can companies like Samsung and LG who have already cross licenced patents to Microsoft.
Not everything in the Microsoft Nokia deal fits in with the 'one Microsoft' plan though. As well as the Lumia handsets, Microsoft is taking over Nokia's Asha Symbian phones and featurephones like the newly launched Nokia 515.
Microsoft has only just finished transitioning Windows Phone and Xbox to the Windows kernel and now it's going to have multiple platforms again – in a market where it has little experience and none of it good. Even if Asha doesn't turn into another Sidekick or Kin – Microsoft's last phone acquisition didn't go well – it could be confusing for customers.
On the other hand, Microsoft can't afford to only develop for Windows and Windows Phone. Steve Ballmer promised that "we're not holding back services from other vendors." Making Microsoft services available on the first phone people buy as well is an opportunity to get them before they start in the Google or Apple world.
- Why not check out what we thought about Steve Ballmer stepping down as Microsoft CEO?