This story has been updated to add new information.
Microsoft is going to buy the handset business of mobile phone maker Nokia for just over $7 billion, the two tech giants announced Monday, a decision long expected as Nokia smartphones are the biggest users of the Windows Phone 8 operating system.
The deal will include “substantially all of Nokia’s Devices & Services business,” and the acquisition of licenses to all of Nokia’s patents, the two companies jointly announced. Microsoft said it will draw on overseas cash resources to fund the transaction, making it an all-cash deal, and that it is expected to close in the first quarter of 2014.
Nokia is headquartered in Finland and entered into a deal with Microsoft in February of 2011 in which Nokia would use Microsoft’s Windows Phone OS in its smartphones, abandoning Nokia’s proprietary Symbian OS. The Wall Street Journal tech news Web site AllThingsD reports that Microsoft knows that in order to succeed in the smartphone business, “it cannot afford to leave the success in the hands of a partner–even one like Nokia that had bet its future on Microsoft’s phone software.”
Nokia had long been the world’s top seller of mobile phones, but in the smartphone era, it fell behind market leaders Apple with its iOS platform and Google, whose Android OS is used on Samsung, HTC and Motorola devices.
Although Windows Phone runs on a couple of smartphone hardware brands, it’s been most successful on Nokia smartphones, with 7.4 million Nokia phones, such as the Lumia line, sold in the second quarter of 2013. Adding Windows Phone 8 devices sold by others such as Samsung, Huawei and HTC, sales totaled 8.7 million units in the second quarter, from just 4.9 million units in the year ago quarter, vaulting Microsoft past BlackBerry for third place in smartphone sales, based on OS, according to the research firm IDC. But Microsoft is a distant third, far behind Apple iOS, with 31.2 million units shipped and number one Google Android at 187.4 million in the second quarter.
But the 77.6 percent growth in Windows Phone 8 sales convinced me that, even though it's a distant third, Microsoft enjoys some significant momentum.
Microsoft is betting that owning Nokia rather than just partnering with it will improve Microsoft’s fortunes in the smartphone space.
“Bringing these great teams together will accelerate Microsoft’s share and profits in phones, and strengthen the overall opportunities for both Microsoft and our partners across our entire family of devices and services,” said Microsoft CEO Steve Ballmer, in a prepared statement.
The companies said that 32,000 Nokia employees will be given jobs at Microsoft, including Nokia President and CEO Stephen Elop, who will become executive VP of devices and services at Microsoft. AllThingsD reports that Elop has been considered as a replacement for Ballmer as CEO of Microsoft. Microsoft announced Aug.23 that he was stepping down sometime within the next 12 months.
UPDATE: Nokia and Microsoft executives Elop and Ballmer held a news conference Tuesday morning Finnish time. In it, Ballmer downplayed speculation that Elop is expected to succeed him as Microsoft CEO: "You shouldn't read anything into it," he said.
At the news conference, Microsoft also shared a slide presentation that laid out some of the details of the merger. Under the current arrangement in which Nokia uses Windows Phone exclusively in its phones, Microsoft makes only $10 profit on each Nokia/Windows phone sold. With Nokia becoming part of Microsoft, that profit rises to $40 per phone. Microsoft also makes the point that acquiring Nokia better integrates the design of the phone with the operating system, something that has benefited one of its chief rivals, Apple, which controls the hardware and software in the iPhone.
Historically, Microsoft has focused on software, leaving hardware development to its partners. It deviated from that policy by making its own Xbox gaming console starting i 2001, and then introduced the Surface line of tablet computers in 2012.