Microsoft, Nokia and the sound of colliding garbage trucks
$7.1bn... quite a hefty price tag for joined-up marketing
Opinion History, it is said, doesn't repeat itself – there are merely echoes through time. Listening to Microsoft's $7.1bn purchase of Nokia's phone and services, you'd have certainly heard an echo – the distant grinding noise of two colliding garbage trucks reverberating down the years.
The phrase "the sound of two garbage trucks colliding" was coined by Sun Microsystems' co-founder and chief executive Scott McNealy to describe the merger of rivals Hewlett-Packard and Compaq.
McNealy used it to describe the unseemly act of two elderly corporate tech giants with outdated practices and ageing products attempting a merger.
Cruelly, the phrase was turned back on McNealy when his struggling Sun chucked $4.1bn at StorageTek, a giant marooned on a tape storage island as the world went digital.
With Microsoft and Nokia, we again hear the sound of rending metal. Nokia and Microsoft are huge operations – with roughly 32,000 and 100,000 staffers respectively. And neither is particularly new or adept at changing their business practices and structures.
Nokia is cast as StorageTek in this latest merger. Once the world's largest maker of handsets, Nokia's lost market share and money as the world moved on. Microsoft is like Sun: tied to a once thriving business - PCs - that market is getting left behind as the world moves on, adopting tablets and smartphones instead. It has a pile of cash at hand to buy its way into a new chapter.
But lo! The sound of dump trucks reverberates across the horizon.
Yet Nokia is no silver bullet for Microsoft on phones and tablets. Rather, it's a big, formless lump of metal.
Lost in the big-picture headlines of Tuesday was this financial gem: Microsoft is extending Nokia a $1.97bn (€1.5bn) line in prime financing delivered in three blocks that Nokia will repay, if (or when) the deal closes as expected in the first quarter of 2014. In other words, Microsoft is offering to help keep Nokia's operations funded for the remainder of 2013, a fact that raises questions about whether alarm bells were ringing inside Nokia and Microsoft over the former's fiscal health.
Nokia's turnaround - and Microsoft's plans for it
Nokia is lagging behind on chief executive Stephen Elop's Windows Phone turnaround plan: in its most recent quarter, Nokia lost $150m, as phone and device sales were down – substantially. The company had €4.07bn ($5.34bn) in cash and other liquid assets that it could draw upon - but this was down, too, from €4.36bn ($5.73bn) in January.
Nokia, meanwhile, was often reported to be open to shipping a phone running Android – the market's current number one mobile OS. A distracted or weakened Nokia would have been a disaster for Microsoft, given that Nokia makes more than 80 per cent of Windows Phones sold.
Reports today say the deal with Microsoft was agreed quickly during the summer. Incoming Microsoft board member ValueAct was not apprised of the deal, meaning Nokia isn't a VC-authored mobile turn-around.
On a conference call on Tuesday with Wall Street, Microsoft chief executive Steve Ballmer made it clear that he expects Nokia will continue to remain the sole Microsoft Windows Phone supplier for a very long time, based on today's market-share numbers.
"I don't foresee that changing dramatically in the short run. But if the market grows, I expect to see additional percentages, if you will, go to our OEMs, but it's premature to predict today," Ballmer said.
So was this a rescue deal? The rationale for Microsoft taking ownership of Nokia makes little sense based on Steve Ballmer's own justifications for Wall Street on Tuesday.
Asked what Microsoft would change that wasn't possible before owning Nokia, Ballmer said: "Number one, we talked about one brand and a unified voice to the market."
Rhubarb, innovation, rhubarb, business agility, rhubarb
Following on from integrating Microsoft and Nokia into a single “unified voice”, Ballmer's next point on Wall Street's conference call saw some waffle about the efficiency of "being one company" on innovation: "The Lumia 1020 is awesome in terms of what it has for camera and imaging and yet I think as one company, we would have doubled down on that amazing, even greater range of software and services investment around the core hardware platform," Ballmer said.
And his third point? More waffle, on "business agility."
"As two companies,” said the Microsoft CEO, “we're making two independent sets of decisions about where and when and how to invest, by country, by operator, by price point."
Owning Nokia actually makes a mockery of the company's 2011 partnership on the Lumia range. Here's how Ballmer described the partnership with Nokia when the Finnish phonemaker killed its Linux and Symbian projects and picked Windows Phone: "Nokia and Microsoft working together can drive innovation that is at the boundary of hardware, software and services."
If we're to believe the marketing that's recently coming from Nokia and Microsoft, then the Lumia 1020 was one of the best phones of all time because it had a better camera than Android and iPhone. According to Microsoft, things were working, with the 1020 outselling BlackBerry in many markets - admittedly, not exactly a major achievement considering how badly BlackBerry is faring.
This brings us back to justification, and based on Ballmer's justifications on Tuesday, the strongest justification we can see is marketing: one brand and a unified voice in the market. In other words, Microsoft just paid a heck of a lot for money for some unified marketing with a partner.
No, it seems Microsoft and Nokia needed each other. And, I'd suggest on that basis, Microsoft is too scared of handling its potential new possession too roughly in case it breaks the magic. Which brings us back to the faint rumble of garbage trucks colliding.
Nokia brings 32,000 employees to Microsoft's existing payroll army of 99,000. By any stretch of the imagination that will mean rationalisation - especially for a company like Microsoft that has been trying to contain costs with incremental staff cuts. But on its call with Wall Street, Microsoft was not giving anything away on where or when – or even if – the axe would fall.
Asked about a rationalisation, Ballmer passed the ball to chief financial officer Amy Hood, who dodged the question, saying Ballmer and Elop were being "thoughtful about the rationalisation so that we get to one voice, one brand and one team that can best execute and be efficient."
I'd have said "over to you Steve" but Ballmer's on the way out.
Pain certainly lies ahead: Ballmer said Tuesday his recently announced reorganisation remains "absolutely intact". But that's not true. Already, devices chief Julie Larson-Green, elevated under that re-org, is getting bumped down a notch by prospect of the incoming and soon-to-be former Nokia CEO Stephen Elop taking the division's top slot. Time will tell whether this CEO of a listed company will be happy playing a mere divisional role once again, or whether he covets the top job at Microsoft.
Adding further pressure: Ballmer's new structure must absorb an unknown and vast number of Nokia mobile and device employees – this will radically distort the structure of what has been until now a PC and server company.
According to Ballmer, who leaves in 12 months: "Stephen Elop will run the group and will take the appropriate steps with Julie, working with Stephen, to figure out appropriate integrations."
That's wishful thinking, because nothing is figured out so easily in a Darwinist corporate environment like Microsoft, where individuals and product groups vie for primacy and where we're told turf wars have already started on the news Ballmer was leaving.
So what can we conclude? That Microsoft is spending $7.1bn for unified phone marketing and help keep Windows Phone in the game. And, based on Sun's success with StorageTek, Microsoft will end up getting bought by Oracle. Well, maybe not the latter, but then I did say at the beginning – history doesn't repeat itself, you just get echoes from the past. ®