On September 3, 2013, Microsoft announced the acquisition of Nokia's Device and Services business for $5.44 billion Euro (US$ 7.2 billion), including the license to use Nokia's patent portfolio and map service. Of the total transaction price, $3.79 billion Euro will be paid to purchase Nokia's Devices & Services business, and $1.65 billion Euro for a 10-year non-exclusive license to use Nokia's patents.

Reasons for the Acquisition

1. Nokia's Rich Patent Portfolio:

The value of Nokia's patent portfolio was evidenced as early as its lawsuits against Apple in 2009, accusing the latter of infringing 46 patents. In 2011, Nokia successful collected licensing and loyalty fees from Apple. Then, Nokia continued to launch patent lawsuits against RIM, HTC and other mobile phone vendors, receiving as much as US$600 million a year from patent-related income. In terms of its patent number, Nokia owns 16,000 patents in the United States (excluding patents in application) and 20,000 patents outside the United States (excluding patents in application), mostly in Europe. As for patent quality, Nokia takes up 19% of the LTE (Long-Term Evolution) Standards Essential Patent ¡V higher than that of Qualcomm. In addition, Nokia and Qualcomm reached a 15-year patent licensing agreement in 2008, allowing the use of Qualcomm's patents in Nokia mobile phones.

From this point of view, Microsoft will only pay US?$ 2.17 billion for a 10-year license to use Nokia patents, including all patents authorized by Qualcomm, making the transaction a good deal for Microsoft.

2. Nokia's Brand Value and Ability in Mobile Phone Hardware Sale

As a traditional mobile phone giant, Nokia has an edge in design, hardware manufacture, distribution channel, and supply chain management. Through this transaction, Microsoft aims to increase its control over hardware, thereby enhancing the degree of software and hardware integration. Thus, Microsoft will mainly draw on Nokia's ability in hardware design and outsource the production to contract manufacturers. Moreover, Nokia established good relationship with telecom operators in the heyday of its feature phone business, and has a strong sales channels and brand image in emerging markets. These are added value to Microsoft's entrance into the mobile phone industry.

Impacts of Microsoft-Nokia Merger on the Smartphone Industry

Following the Microsoft's acquisition of Nokia, the world's top three mobile operating system developers now have all possessed unprecedented hardware design capabilities. It seems that Microsoft has been given two options for its future. It can either opt for a closed model like Apple's iOS through which the company can get full control over its software and hardware developments or it can make its system an open one like Google's Android.

MIC expects that adopting Apple's closed model seems to be a more rational decision for Microsoft. This is mainly ascribed to the fact that Nokia still manages to launch a wide range of smartphones with different features at different prices while Apple still sticks to its one-a-year iPhone strategy. With iOS hitting the innovation ceiling and catching up by Android OS, Apple's one-a-year iPhone strategy is deemed inflexible. Let's assume that if both Windows Phone OS and iOS each have 15% market share by 2018 and Apple continues to stick to its one-a-year iPhone strategy, Windows Phone OS is likely to sustain its market share with low-cost products while iOS will probably focus on the mid-range and high-end markets that continue to shrink.

However, Microsoft is still lagging behind Apple in terms of ecosystem scale and control over the consumer market. As for the ecosystem scale, Apple's iOS has a total of over 900,000 applications while Windows Phone OS only has 150,000 and the development pace of apps is slowing down. Talented developers who have come up with killer apps in the past are still in favor of developing iOS apps. Windows Phone OS still has long way to go to catch up with iOS in apps development.

Looking at their control over the consumer market, Nokia and Microsoft used to be the forerunners in the smartphone industry but it is Apple who pushed the industry to the highest level. Although being overtaken by Android later, Apple still owns strong user loyalty and thus the chance of Nokia and Microsoft tapping into the consumer market is not as promising as it seemed.

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