Microsoft acquires Nokia's handset business for $7.2B

Microsoft Nokia

Microsoft NokiaMicrosoft  has reached an agreement to purchase Nokia’s  mobile phones business and a license to its patents and mapping software for $7.2 billion. The blockbuster deal is expected to close in the first quarter of 2014.

Per terms of the agreement, Microsoft will roughly a third of Nokia’s 88,000 employees and much of its Lumia smartphone and Asha feature phone business. Nokia adopted Microsoft’s Windows Phone mobile operating system as its primary smartphone platform in early 2011. Sales of Lumia devices increased 112.7 percent year-over-year during the second quarter of 2013 to account for 80 percent of Windows Phone 8 handset sales worldwide, according to research firm Gartner.

Acquiring Nokia promises to give Microsoft the flexibility to accelerate the development of Windows Phone-powered devices, allowing the company to compete more effectively against Apple and Google,  which in 2011 acquired Motorola’s mobile phone business for around $12.5 billion. Gartner reports that Windows Phone represents 3.3 percent of worldwide smartphone sales, far behind Google’s Android at 79 and Apple’s iOS at 14.2 percent.

Microsoft said it will continue to license the Windows Phone OS to other manufacturers. “Today’s announcement doesn’t change that–acquiring Nokia’s Devices group will help make the market for all Windows Phones, from Microsoft or our OEM partners,” wrote Microsoft Windows Phone Corporate Vice President Terry Myerson in a blog post.

The deal is a logical step for Microsoft but does not immediately change the firm’s position behind Google and Apple, said Analysys Mason Principal Analyst Ronan de Renesse. “Microsoft will gain a foothold in developing markets via Nokia’s non-Lumia device portfolio: 45.5 percent of Nokia mobile device shipments went to Greater China, Middle East & Africa and Latin America in 2012. This strengthens Microsoft’s position versus Google in connecting the next billion people,” de Renesse explained. “Microsoft has the ability to undercut its competitors and use mobile as a loss leader to gain global reach for its services and software ecosystem. No handset manufacturer except Nokia has been fully committed to Windows Phone platform in the past 12 months. Maybe it’s time for Microsoft to abandon its Windows licensing model in mobile.”

The acquisition also adds an unexpected wrinkle to Microsoft’s company-wide reorganization plans, announced in July. The firm said it will focus its efforts on delivering services and devices for individuals and businesses optimized for use at home, at work and on the go. Late last month, Microsoft CEO Steve Ballmer said he will retire within the next 12 months, once a successor is chosen.

Nokia, not long ago the world’s largest mobile phone manufacturer, plans to move forward with three businesses: Nokia Solutions and Networks, which provides network equipment to carriers; HERE, which sells mapping and location services; and the new Advanced Technologies, which Nokia said “will explore new business opportunities through advanced research, development and concept products in areas such as connectivity, sensing and material technologies, as well as web and cloud technologies.”

Nokia will retain its patent portfolio and will grant Microsoft a 10-year non-exclusive license to its patents. Microsoft will give Nokia reciprocal rights to leverage Microsoft patents in its HERE services; Microsoft also will become a strategic licensee of the HERE platform, and will separately pay Nokia for a four-year license. The HERE real-time traffic data platform processes 20 billion real-time GPS probe points each month; just last week, Nokia unveiled HERE Auto, an embedded, in-dash navigation system that delivers mapping information with and without a data connection.

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