Preceding analysis of the announcement materials on this blog:
Unique Nokia assets (from factories to global device distribution & sales, and the Asha sub $100 smartphone platform etc.) will now empower the One Microsoft devices and services strategy [‘Experiencing the Cloud’, Sept 3, 2013]
Other views are given here as well, after the Q&A excerpts coming immediately below. From a Reuters’ editor, an IHS senior analyst, an investment bank executive, and a business news presenter on France24 – in the form of 4 embedded videos. Those views could be summarized as “Nokia did a good deal while the success of Microsoft with this acqusition is uncertain and needs a lot of further investment”.
Let’s see how much the answers to the questions on the Microsoft Nokia Transaction Conference Call (Sept 3, 2013 ) were able to clarify the analyses and critical views:
Tablets?
STEVE BALLMER: Tablets is an area where we absolutely have our own first-party hardware, as you know, and see opportunities to continue to build and strengthen. And it’s an area where we have very strong programs in place with our OEMs, particularly on the Intel Atom-processor-based product lines that people will really get a lot of value on, and you’ll see a range of new products coming for the holiday season.
Scaling Windows down?
TERRY MYERSON: It’s definitely a priority for us to bring Windows to as many customers as we can around the world. Lower-price phones is a strategic initiative for the next Windows Phone release, but we have nothing more really to say now.
Acquisition effect on the reorg?
STEVE BALLMER: No [effect], the reorg is absolutely intact. Obviously, the devices business has a broader scale and new capability. Julie Larson-Green, who is running devices and studios is flat out. We’ve got a lot of work we’re doing here over the next several months. And Julie and her team will work on a planning and integration phase. Julie will continue. She’s excited about working on devices, but absolutely, the critical mass of the group with that acquisition is in the phone space, and Stephen Elop will run the group and will take the appropriate steps with Julie working with Stephen to figure out appropriate integrations.
Windows Phones coming from OEMs in the future?
STEVE BALLMER: Today, Nokia, as I said, is well over 80 percent of all of our phones, and I don’t foresee that changing dramatically in the short run, but as the market grows, I expect to see additional percentages, if you will, go to our OEMs, but it’s premature to predict today. We definitely have interest from OEMs in the Windows Phone opportunity given that people understand we’re going to blaze the trails here with our own first-party hardware.
Cost rationalization over time?
STEVE BALLMER: Amy will take it. I do want to highlight that in many hardware companies, manufacturing labor is primarily outsourced. And Amy can remind us the numbers, but in Nokia, there is more in-sourced manufacturing. Nokia has had a strategy about that that, obviously, they’ve executed very well. But you kind of have apples and oranges a little bit between the 32,000 and our almost 100,000. But Amy, why don’t you provide some context and detail?
AMY HOOD: Sure. Thanks, Brent. About 18,000 of those 32,000 employees are really directly a part of the manufacturing business. And so I think a better way as you think about the scale and opportunity is to really focus on the percentage of Nokia outside of that.
I think both Steve and Stephen did a thoughtful job in the execution slide about talking about the philosophy we’re using as we go through the integration process around the benefits of the incremental sales force that we’re getting with Chris and his team, as well as really going through and being thoughtful about the rationalization so that we get to one voice, one brand, one team that can best execute and be efficient.
What was not possible that the acquisition enables now, or is it only ensuring a presence in the smartphone market for a long-term basis, i.e. ‘One Microsoft’ empowerment?
STEVE BALLMER: Well, the latter is certainly true. We see at least three distinct opportunities to do better as one company than as two.
Number one, we talk about one brand and the unified voice to the market. I will say that I think we can probably do better for consumer name than the Nokia Lumia Windows Phone 1020. And yet, because of where both companies are and the independent nature of the businesses, we haven’t been able to shorten that. Just take that as a proxy for a range of improvements that we feel we can make, we can simplify, the way in which we work with operators and the overall consumer branding and messaging gets much simpler. That is an efficiency of being one company.
On the innovation front, we’ve done a lot of great work together, and yet as two companies, there’s always some lines along which it’s hard to innovate. 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 bet and made an even greater range of software and services investments around the core hardware platform.
Third, I think we get business agility. As two companies, we’re making two independent sets of decisions about where and when and how to invest by country, by operator, by price point, and there is, let me say, an inefficiency financially as well as a lack of agility that comes with that.
So in all three of those areas, despite the fact that I think we’ve done a really good job, we can improve and accelerate quite noticeably.
How the much needed developer support for the fairly aggressive market share assumption will be ensured?
Note: the “fairly aggressive market share assumption” was presented by Microsoft as:
To which I added the following calculation and judgment in my analysis post:
15% of the 1.7B units in 2018 is 255M units. The ~$45 billion estimated revenue at that time means ~$176 ASP. Considering the latest Q2’13 EUR 157 [$207] ASP of Lumia it seems feasible, but in 5 years timeframe it needs a strong premium strategy to achieve that. … NPV – Net Present Value.
TERRY MYERSON: Well, for developers today, Windows offers an incredible opportunity with the installed base of PCs, phones, and tablets, and soon the new Xbox One. We want to offer them this opportunity to build either HTML5 applications or native applications that span all of those devices, enabling them to reach segments of users on those devices, users in an enterprise, users on a gaming console, and just provide them very unique opportunities to monetize their application investments.
So we’re pretty excited about the platforms we’re bringing to market. Developer reception in some areas is certainly better than others, but overall we’re making progress, and we know we’ve got a lot more work to do.
STEVE BALLMER: One of the keys, of course, is driving volume. We think we have differentiated products. We can tell the story a little bit better. We can get the volume up, and we have over 160,000 applications in the store. We know we have a long way to go, and the key is really offering with our own first-party applications and first-party hardware, enough reasons to buy to drive volumes and then attract the broader developer ecosystem.
Obviously, HTML5 would be kind of a neutral thing. I would expect all the major platforms to embrace it to some extent. And in some senses, it takes away a little bit of the apps barrier to entry, which we know we need to work hard on right now.
See also Microsoft Nokia Transaction Conference Call with slides from Microsoft Strategic Rationale inserted- ebook – 3-Sept-2013
edited by Sándor Nacsa from those two sources into an ebook format PDF
The real question around the web is: Can Microsoft do a better job as in Breakingviews: Nokia’s smart to take money & run [Reuters TV YouTube channel, Sept 3, 2013]
The view of an expert from IHS, a big business analysis firm, for comparison:
Microsoft & Nokia still face huge ‘brand and cool’ challenge – Gleeson [4-traders.com, 09/03/2013 | 12:30pm US/Eastern]
Microsoft buys Nokia’s handset business for $7.2 bln. Both companies will be hoping it heralds a new era, but overcoming brand weakness will be a huge challenge. For them both, says IHS Senior Mobile Analyst, Daniel Gleeson.
SHOWS: LONDON, ENGLAND, UK (REUTERS – ACCESS ALL) (SEPTEMBER 3, 2013)
1. IHS, SENIOR MOBILE ANALYST, DANIEL GLEESON, SAYING:
JOURNALIST ASKING DANIEL GLEESON: ‘Well is this a good deal for Nokia and is it enough to drag it into the 21st century?’
DANIEL GLEESON: ‘It is a big deal. Whether it’s not- I don’t think it is enough really. You’ve got two titans of the past really kind of clashing together. It does provide Microsoft with the ability to merge the handset and the software side of the mobile businesses together which gives it a better chance of breaking through. However I think Microsoft are probably being overambitious. Microsoft has stated that they’re aiming to get 15% of the smartphone market by 2018 which will be equivalent to somewhere in the region of more than 200 million smartphones. Given that the current Nokia smartphone run rate is somewhere in the region of 30 million units, that’s quite a lot of growth that they’re looking for and practically I don’t think that’s possible.
JOURNALIST: ‘So you don’t think that Apple and Samsung and the like will be quaking in their boots?’
DANIEL GLEESON: ‘Not at the moment. Microsoft had been very slow in developing the Windows Phone platform over the past few years. There’s been very little development on the software side. Most of the innovation on it has actually come from Nokia. So obviously the hope is that Nokia will be able to bring this innovation to Microsoft and spur on the software development. However, with the current reorganization that Microsoft is going through and the fact that Ballmer is going to be stepping aside at the end of the year or within the next 12 months, that is very uncertain. So it remains to be seen about how Microsoft can evolve and adapt to taking in the hardware unit.’
JOURNALIST: ‘Sorry, just going to say, Nokia’s shares rose almost 50% this morning. But the company as we all know is still a shadow of its former self.’
DANIEL GLEESON: ‘Yeah, it very much is. It used- obviously a couple of years ago Nokia was the largest smartphone and handset vendor in the world. It is now I think like behind the many Chinese, smaller Chinese companies in terms of smartphone shipments and dropping rapidly in terms of the handset market. What we see though is that Nokia does have a good future with its NSN business, its network vendoring business. That’s after going through major turnaround over the past while and then past four quarters it’s managed to turn a profit on that. So that’s going to be the future that Nokia’s looking at and that part of the business is looking bright.’
JOURNALIST: ‘Does this deal do anything to address I suppose what is fundamental certainly in the public’s perception of both companies, the fundamental premise that neither brand is cool in anyway whatsoever. I mean the brands are very, very weak. Does this do anything to address that?’
DANIEL GLEESON: ‘Fundamentally it doesn’t because as you said this is just simply the uniting of two uncool brands. This doesn’t make it any better. It’s going to take a lot of investment from Microsoft to try to turn that brand around. Of course the upside of it is Microsoft has much deeper pockets to do this than Nokia on its own would have. So you are in the situation where Microsoft was funneling a lot of cash into Nokia anyway to try to support the smartphone unit. So Microsoft presumably just by taking it in-house is just absorbing that cost and it’s going to be able to push even more money into it to try to build that brand and to make it better in the future.’
And here is a similar view of an executive from a Danish online investment bank, Saxo Bank: The Nokia deal: What’s Microsoft thinking? [TradingFloorCom YouTube channel, Sept 3, 2013]
Why has Microsoft agreed to buy Nokia’s moible phone business for more than five billion euros? It’s somewhat perplexing to Saxo Bank’s Head of Equity Strategy, Peter Garnry. It’s a great deal for the struggling Finish handset maker, he says. But he has real concerns about how good it will be for Microsoft, one of the world’s leading technology players. Nokia shares rose by around 45% on the open on Tuesday. Peter says it’s also really good news for the company’s bond holders as the company was hemorrhaging cash. However, Peter says Microsoft have paid a lot of money in this deal, which is due to be finalised next year. He says they’re still not as good a hardware company as Samsung or Apple and he adds that nine out of ten acquisitions do not fulfill synergy expectations. He says it’ll be very difficult for Microsoft to integrate Nokia into its business and move it foreward. So where does this leave rival Blackberry, which is already struggling to compete on the smartphone market? Peter says the company should start focusing on what they are good; mobile security and increase shareholder value that way. Nokia’s phone business marks the exit of a 150-year-old company that once dominated the global cellphone market.
The stock market reaction is discussed further in Investors cautious over Microsoft move on Nokia and how one man got his lost bags delivered [FRANCE 24 English YouTube channel, Sept 4, 2013]
Full text of Q&A part of the
Transcript of Microsoft Nokia Transaction Conference Call: Steve Ballmer, Stephen Elop, Brad Smith, Terry Myerson, Amy Hood; September 3, 2013 [Microsoft, Sept 3, 2013] to have the full Q&A context
OPERATOR: Walter Pritchard, Citigroup, your line is open.
WALTER PRITCHARD: Great. Thanks for taking the question. Steve Ballmer, on the tablet side, obviously, we could say many of the same things as you’ve put into this slide deck as rationale for doing an acquisition on the phone side as we could say about the tablet side including picking up more gross margin.
I’m wondering how this transaction impacts the strategy going forward in tablets and whether or not you need to, in a sense, double down further on first-party hardware in the tablet market. And then just have one follow up.
STEVE BALLMER: Okay. Terry, do you want to talk a little bit about that? That would be great.
TERRY MYERSON: Well, phones and tablets are definitely a continuum. You know, we see the phone products growing up, the screen sizes and the user experience we have on the phones. We’ve now made that available in our Windows tablets, our application platform spans from phone to tablet. And I think it’s fair to say that our customers are expecting us to offer great tablets that look and feel and act in every way like our phones. We’ll be pursuing a strategy along those lines.
STEVE BALLMER: Tablets is an area where we absolutely have our own first-party hardware, as you know, and see opportunities to continue to build and strengthen. And it’s an area where we have very strong programs in place with our OEMs, particularly on the Intel Atom-processor-based product lines that people will really get a lot of value on, and you’ll see a range of new products coming for the holiday season.
WALTER PRITCHARD: And then, Terry, can you talk about just the ability to scale Windows down? Obviously, Nokia has a large base of very low-price feature phones. That base may be sort of dwindling over time, but you’ve been cost-reducing Windows, the specs and so forth, to be able to get Windows down to low-price devices. Can you talk about any efforts to accelerate that process given potentially access to a much bigger pool of low-cost phones that are out there already?
TERRY MYERSON: It’s definitely a priority for us to bring Windows to as many customers as we can around the world. Lower-price phones is a strategic initiative for the next Windows Phone release, but we have nothing more really to say now.
STEVE BALLMER: Operator, we’ll move to the next question please, thanks, Walter.
(Break for direction.)
OPERATOR: Our next question is from Mark Moerdler from Sanford Bernstein, your line is open.
MARK MOERDLER: Thank you. Steve Ballmer, two questions: The first one is how does this affect the reorg? Given hardware was in one group and operating systems in another, software in another, does the Nokia device — does the merger affect that? Does it merge into the hardware business, and hardware/content device group? Or does this now change that? And then I have a follow up.
STEVE BALLMER: No, the reorg is absolutely intact. Obviously, the devices business has a broader scale and new capability. Julie Larson-Green, who is running devices and studios is flat out. We’ve got a lot of work we’re doing here over the next several months. And Julie and her team will work on a planning and integration phase. Julie will continue. She’s excited about working on devices, but absolutely, the critical mass of the group with that acquisition is in the phone space, and Stephen Elop will run the group and will take the appropriate steps with Julie working with Stephen to figure out appropriate integrations.
MARK MOERDLER: Excellent. And then as follow up on it, what’s your expectation going forward in terms of — I just want to clarify this — the percentage of Windows Phones that will be from OEMs?
STEVE BALLMER: Today, Nokia, as I said, is well over 80 percent of all of our phones, and I don’t foresee that changing dramatically in the short run, but as the market grows, I expect to see additional percentages, if you will, go to our OEMs, but it’s premature to predict today. We definitely have interest from OEMs in the Windows Phone opportunity given that people understand we’re going to blaze the trails here with our own first-party hardware.
MARK MOERDLER: Thank you very much, appreciate it.
CHRIS SUH: Thanks, Mark. I just want to remind you, we do want to get to as many questions from as many of you as we can. So I do ask that you please just stick to one question and avoid long, or multi-part questions, please. Operator, next question, please.
OPERATOR: Brent Thill, UBS, your line is open.
BRENT THILL: Thanks. Just on the cost rationalization. Nokia has 32,000 employees versus Microsoft at 99,000. A considerable bulk of employees. Can you just talk about the rationalization over time and your view how that plays out?
STEVE BALLMER: Amy will take it. I do want to highlight that in many hardware companies, manufacturing labor is primarily outsourced. And Amy can remind us the numbers, but in Nokia, there is more in-sourced manufacturing. Nokia has had a strategy about that that, obviously, they’ve executed very well. But you kind of have apples and oranges a little bit between the 32,000 and our almost 100,000. But Amy, why don’t you provide some context and detail?
AMY HOOD: Sure. Thanks, Brent. About 18,000 of those 32,000 employees are really directly a part of the manufacturing business. And so I think a better way as you think about the scale and opportunity is to really focus on the percentage of Nokia outside of that.
I think both Steve and Stephen did a thoughtful job in the execution slide about talking about the philosophy we’re using as we go through the integration process around the benefits of the incremental sales force that we’re getting with Chris and his team, as well as really going through and being thoughtful about the rationalization so that we get to one voice, one brand, one team that can best execute and be efficient.
CHRIS SUH: Thanks, Amy. Next question, please, operator.
OPERATOR: Keith Weiss, Morgan Stanley, your line is open.
KEITH WEISS: Thank you guys for taking the question. You guys have talked about the success and the partnership to date in putting out some really good products. I was wondering, Steve, perhaps you could give us some concrete example of what does the acquisition enable you to do that you guys couldn’t do through the partnership? And maybe give us some more concrete examples there. Or is that maybe not the point? Maybe the point is more so that this really solidifies Microsoft’s presence in the smart phone market, and this is more about ensuring that you guys are going to be a presence here for a long-term basis.
STEVE BALLMER: Well, the latter is certainly true. We see at least three distinct opportunities to do better as one company than as two.
Number one, we talk about one brand and the unified voice to the market. I will say that I think we can probably do better for consumer name than the Nokia Lumia Windows Phone 1020. And yet, because of where both companies are and the independent nature of the businesses, we haven’t been able to shorten that. Just take that as a proxy for a range of improvements that we feel we can make, we can simplify, the way in which we work with operators and the overall consumer branding and messaging gets much simpler. That is an efficiency of being one company.
On the innovation front, we’ve done a lot of great work together, and yet as two companies, there’s always some lines along which it’s hard to innovate. 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 bet and made an even greater range of software and services investments around the core hardware platform.
Third, I think we get business agility. As two companies, we’re making two independent sets of decisions about where and when and how to invest by country, by operator, by price point, and there is, let me say, an inefficiency financially as well as a lack of agility that comes with that.
So in all three of those areas, despite the fact that I think we’ve done a really good job, we can improve and accelerate quite noticeably.
KEITH WEISS: Excellent, thank you.
CHRIS SUH: Thanks, Keith. Operator, I think we have time for two more questions, next question, please.
OPERATOR: Rolfe Winkler, Wall Street Journal, your line is open.
ROLFE WINKLER: Hi, you guys have 15 percent, a fairly aggressive market share assumption for where you guys are going to go in a few years. I guess I’m wondering, to get there, one thing you’re going to need is a lot of developer support. Developers already have IOS, Android — you can make an argument that HTML5 over the next few years will grow, that will give them a third development platform. How will you guys convince them to develop for Windows Phone?
STEVE BALLMER: Terry, why don’t you talk a little bit about developers, if you don’t mind?
TERRY MYERSON: Well, for developers today, Windows offers an incredible opportunity with the installed base of PCs, phones, and tablets, and soon the new Xbox One. We want to offer them this opportunity to build either HTML5 applications or native applications that span all of those devices, enabling them to reach segments of users on those devices, users in an enterprise, users on a gaming console, and just provide them very unique opportunities to monetize their application investments.
So we’re pretty excited about the platforms we’re bringing to market. Developer reception in some areas is certainly better than others, but overall we’re making progress, and we know we’ve got a lot more work to do.
STEVE BALLMER: One of the keys, of course, is driving volume. We think we have differentiated products. We can tell the story a little bit better. We can get the volume up, and we have over 160,000 applications in the store. We know we have a long way to go, and the key is really offering with our own first-party applications and first-party hardware, enough reasons to buy to drive volumes and then attract the broader developer ecosystem.
Obviously, HTML5 would be kind of a neutral thing. I would expect all the major platforms to embrace it to some extent. And in some senses, it takes away a little bit of the apps barrier to entry, which we know we need to work hard on right now.
CHRIS SUH: Thanks. Operator, let’s move to the last question, please.
OPERATOR: Our last question comes from Rick Sherlund.
RICK SHERLUND: Thanks. I wonder if you could just share with us whether ValueAct was made aware of this before they entered their cooperation and standstill agreement.
STEVE BALLMER: Brad, do you want to take that?
BRAD SMITH: The answer is no. You would not expect the company to disclose material, non-public information to an entity that doesn’t have an appropriate non-disclosure agreement. So the answer is no.
RICK SHERLUND: Okay, thank you.
CHRIS SUH: Okay, so that will wrap up our call today. Thank you, again, for joining us. We look forward to seeing many of you at our financial analyst meeting, which will be held on September 19th. Thanks again.
END
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