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Technology Stocks : Nokia Corp. (NOK)
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From: Eric L9/7/2013 12:38:57 PM
   of 9252
Bob Egan of the Sepharim Group comments the Microsoft acquisition of Nokia D&S ...

... with a well constructed and sensible analysis of the challenges facing Microsoft.

>> Microsoft Buys Nokia: What Happens Next Matters Most

Does Microsoft’s acquisition of Nokia really mean a serious competitor to Google’s Android and Apple in the Mobile game?

Bob Egan
Sepharim Group
September 5, 2013

So you’ve been reading the headlines over the last few days, there are the optimists and the pessimists among you on whether or not Microsoft’s acquisition of Nokia will bring a serious contender into the mobile space.

Above all else, Microsoft’s purchase of Nokia’s Device and Services division is about acquiring talent and to an extent, saving face. The Nokia purchase and license deal is one step forward for Microsoft, but perhaps, one small step back.

The three reasons why Microsoft purchased Nokia are:

Great Talent: Microsoft desperately needs employees who know a lot about consumers around the globe.

Best-in-class hardware design and manufacturing

A Rescue-bid for Nokia, its largest OEM, from the brink of financial ruin.

Nokia’s Device and Services turnaround was incomplete. Perhaps more definitely the company was still mustering table stakes. It is waging a hardware battle that where the emphasis is on fashion, design, features (pictures and location) manufacturing and distribution. I continually argue that hardware wars cannot be won and the beachheads established by the early market entrants based on functionality and performance is not sustainable. This assumes of course that an entity has in fact met the markets table stakes. Nokia, nor Microsoft do not – yet.

There is little doubt in my mind, that Nokia’s (and by reference Microsoft) inability to accelerate market share is because both companies have fought the wrong battle, which you’ll recall is killing BlackBerry.

Building an Ecosystem

The big money in mobile comes from building and attracting customers to a suite of services (an ecosystem) – where consumers consume, act, and transact, irrespective of their digital services entry point.

Apple and Google’s Android manufacturers already build hardware as a means to an end. In fact, new device releases in the last 12 months have been evolutionary, not revolutionary (except to the hardworking design engineers of course). This week we also watched Samsung unveil its new Samsung Galaxy gear smartwatch, as the company now try’s to convince users of a smartphone that they need a matching watch. Dick Tracey it may be, but watch this space. Wearable computing will be a very big market tied inextricably to the Internet of Things.

This is not to suggest, by any means, that Apple, or Samsung (aka Google, aka Android) have built complete ecosystems. They have not. But the question now is how much does it matter if Microsoft doesn’t show up to play?

Both Google’s Android and Apple are already benefiting from their network effects -Android in unit volumes dominance and Apple in profits. I think that it is more than interesting that the Android and Apple ecosystems run both in a parallel universe and in complete isolation to Microsoft or Nokia. 27% of Apple and Android users, who do change their ecosystems when they replace their handset, swap between the two ecosystems. By contrast, 40% of people who buy Nokia handsets appear as first time smartphone buyers who are not yet committed to an ecosystem.

It will be interesting now to see how Microsoft will use the Nokia deal to speed up its quest to build an ecosystem that will attract consumers, drive loyalty and create profit, globally.

If Microsoft is indeed serious about staging a growth trajectory for the company over the next 10 years, they will need to:

1. Make big changes in the company’s operating structure. This has to go far beyond the “One Microsoft” reorganization of July 2013 that created functional groups for OS, Apps, Cloud, and Devices, but stopped short of creating an equal Mobile engineering group.

2. Fix the internal civil war dilemma. Microsoft must show that it has finally figured out how to fix its organizational civil wars that pit product teams against product teams, stifling innovation and causing product delays.

3. Invest in consumer analytics/marketing/engagement assets. In an age where consumers continue to drive the notion about the consumerization of IT, the lines between consumers and business users will vanish. Measuring, responding and most importantly, predicting consumer preferences matters most.

4. Spend to Accumulate. While Microsoft has some unique assets compared to many of its enterprise focused counterparts (SAP, Oracle, CA etc.) , the company must start to use its 77$B war chest to buy a hand at the table in consumer analytics, marketing and engagement.

5. Defragment operating systems products. It’s more than a little ironic that after years of Microsoft trying to extend its Windows franchise by pushing its desktop interface to phones, it’s now doing the opposite, pushing its mobile interfaces to the desktop. The problem of course, is that the Windows Mobile interface itself isn’t a consumer-lightening rod, nor is it market tested given its 3.7% share. If you then couple that with an already fragmented and incomplete OS development schema consisting of Win8, WinRT, and WP8 (one is too fat, one too thin and one inflexible).Microsoft still has a lot to do on the OS side.

6. Fix the Operating Equipment Manufacturers (OEM) partner model. Microsoft has to either fix the current OEM environment /partner model, or it needs to buy a big OEM like HP, Lenova or Dell. 65% of the total Windows division revenue of $19.2B comes from Windows operating systems purchased by OEM’s and pre-installed on devices they sell. Operating revenues from OEM’s dropped 10%, a decrease of $1.3B for FE 2013/2012.

In summary Nokia had to change to survive and Microsoft had the most to lose if it didn’t act. I’d submit Microsoft should have acquired Nokia 2 years ago and included the Location group in the purchase. To prosper in the world of mobility involves continuous evolution and Microsoft now needs to set about becoming a credible leader in the mobility space.

Acquisitions success can happen, unfortunately all too many fail far short of creating the expected value. In most cases many of the important attributes that must combine between the two entities and levered for the long-term are the those that often are less visible than, such as, the customer facing product being bought, and not properly assessed or managed. When I do M&A work, I spend as much as 50% of my efforts stack ranking the attributes in a deal that are less visible, but critically important.

As Horace Dediu reminded us earlier this week “A company is defined as the sum of three values: resources, processes and priorities (RPP). When one company buys another it’s the equivalent of one set of RPPs trying to engulf or swallow another set of RPPs”

With an optimistic hat on, we can look to other industries, including the success of Disney following its acquisition of Pixar or Chase’s acquiring of JP Morgan back in 2000, which has made it one of the biggest companies in the banking sector today.

Mobility is really just getting started …

Maybe, just maybe, we should encourage the new kid re-entering the mobile ring. Perhaps this tortoise can win the race and shake the existing duopoly of Google and Apple. ###

Bob Egan and the Sepharim Group: The origins of The Sepharim Group date back to 2002 when Bob Egan built the successful consulting boutique and industry analyst firm – The Sepharim GroupMobile Competency. With the acquisition of Mobile Competency in 2005 by TowerGroup, Bob spent the next six years as the CRO for their MasterCard division (now owned by CEB). In 2010 Bob Egan formally founded The Sepharim Group to renew his commitment as a leading expert and trusted executive advisor for all things mobile:

Bob is a interviewed in the following video in which he discusses how to manage and scale in enterprise mobility....

- Eric -
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