Nokia in acquisition talks with Microsoft? So that’s why Meltemi had to die and Elop kept his job in 2012

It seems that all that Nokia’s talk about things finally turning around, Windows Phone being the right choice and how we will finally the impressive results of that choice later this year, was just that.

An empty talk.

Putting on the brave face, trying to positively spin the collapse in its mobile phone business in Q1, even some positive signs of Lumia growth… It was just a spin to get a better price.

All this time Nokia management was actively shopping themselves to Microsoft.

According to WSJ, Microsoft was recently in advanced discussions about the acquisition of Nokia’s device business, but the talks have recently collapsed “… in part because of the price and Nokia’s own strategic predicament”.

Which probably means that after the disastrous Nokia Q1, Microsoft got scared with the speed of Nokia’s mobile phone business decline and way too slow ramp-up of Lumia sales, and significantly reduced the offering price they’ve been discussing before. Stephen Elop couldn’t justify the new low offer to his board and Nokia walked away from the talks.

That talks were very advanced, nearly at an oral agreement stage, is a very interesting bit of info. It means that they have been going on for many months, possibly for more than a year. And it explains so much about the disastrous strategic choices Nokia made for its mobile phones division over the past year.

Killing of Meltemi, abandonment of Qt, using the Smarterphone to transform S40 into some pretend smartphone OS, dubiously premature WP8 announcements, even Elop’s extended stint as CEO after the disastrous 2011-2012 – it all makes perfect sense now.

Nokia Elop Titanic

I still think that February 11th deal to go exclusive Windows Phone was made in a good faith by both parties. Of course, there was too much hubris at both Nokia and Microsoft, but they really thought they can make the deal work. BAck in early 2011, Nokia was still way too impressed with its own distribution power, and was sure that all it takes is to “flip a switch” to start selling millions of Lumias a month. And Microsoft was still sure that they’ve had a strongly competitive mobile OS on their hands, and all they need is a partner like Nokia to get strongly behind it and really push.

But by mid 2012 it became clear that both of them were wrong. The strength of Nokia sales organization turned out to be an illusion, as did the competitiveness of Windows Phone. Realizing his mistake, and that he will never be able to bring Nokia back to even a shade of former glory, Elop decided to sell the company to Microsoft. Then convinced Nokia board that he can get a good price for it, and got the approval to start negotiations.

But in addition to Windows Phone, Nokia also had another modern Linux based smartphone OS – Meltemi – in the works and almost ready to ship on low end Asha like phones. And that was a problem, because even with the slimmest chance of success, Meltemi was an obstacle for Microsoft. Redmond simply didn’t need another competing smartphone OS, Windows Phone was performing badly enough even without it. And if Nokia had been shipping cheap Meltemi smartphones by the time of the acquisition, Microsoft wouldn’t have been able to kill it without a huge PR disaster. It would have had to spin it off and sell it, ending up with a competing OS in the hands of competitor.

So Meltemi had to die. And it did. Replaced by Asha Touch and its SmarterPhone OS based upgrade, first seen on Asha 501. A pretend smartphone OS with no future.

During 2012 and early 2013, negotiations between Microsoft and Nokia were proceeding at their own pace, keeping Stephen Elop in his job. And they almost had a deal. But then Q1 happened, Nokia mobile phone business crashed, and, despite the official spin, Lumia growth did not impress Steve Ballmer. So Microsoft came with a new, low ball offer for Nokia, and Elop failed to sell it to the board. The acquisition talks collapsed.

So what happens now? Here are some quick thoughts:

  • Stephen Elop is as good as gone as Nokia CEO. Unless Lumia sales magically start getting traction, and start growing much faster than they had grown up to now, or Microsoft gets back with a better offer, he will be gone before the end of this year.
  • Nokia Windows Phone exclusivity will end with Elop’s tenure, and we may see the first Nokia Android phone sometime next year. But don’t expect the true PureView Android phone anytime soon. It took Nokia 18 months to rewrite PV algorithms from Symbian to Windows Phone. So unless Nokia has a secret imaging team working on Android version for months now, it will take a lot of time 41 megapixel Nokia Android to show up.
  • Nokia will become a company for sale, for real this time. While they were pretending to chart an independent course, or when they were talking to Microsoft expecting a good price, there was no reason for Nokia to entertain competing offers. Or anyone to seriously consider buying it. Nobody was more interested in Nokia than Microsoft and nobody could offer a better deal. With Microsoft out of the picture – things are very different now.

In the end it all will depend on how Nokia will do in  the next 6 months. Will they be able to stabilize their mobile phone business, or will it continue to collapse? How fast will Lumia sales grow and what are the margins on Lumia phones? How much cash Nokia has left and how fast is it burning it? Is there enough time to ship a competitive Nokia Android phone?

We’ll get the first glimpse of the new realities in July, when Nokia reports its Q2 results. The numbers will be very interesting, but even more interesting will be to hear the tone and mood of company execs, and future guidance.

That should tell us a lot where Nokia goes from here.

Author: Stasys Bielinis

While I like to play with the latest gadgets, I am even more interested in broad technology trends. With mobile now taking over the world - following the latest technology news, looking for insights, sharing and discussing them with passionate audience - it's hard to imagine a better place for me to be. You can find me on Twitter as @UVStaska'

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  • Sudhakar

    1. There was no reason to kill Symbian so quickly and brutally when it was selling 30 million a quarter. If it is bad, Nokia could have produced as per demand.

    2. Further, there was no reason to kill MeeGo either. The last MeeGo device is still selling hot but Nokia refuses to produce and sell them

    3. Next, there was no reason to go exclusively with a failed MS Windows Phone OS ( which had been losing and losing and had become 2% market share ).

    2. Finally, there was no reason to hate Android.

    All this is intentionally to exploit entire Nokia just to boost Windows Phone OS. As the OS itself is so bad that, even Nokia’s sacrifice could not save it.

  • lol

    Now is the time to license Sailfish OS, Nokia ;D

  • gareth2w

    Interesting point, but I believe it relies on several falacies, but lets fire a few torpedo’s into the argument

    1) New competiting OS? Please step away from the fascination with OS’s, they are 2-a-penny and really do not excite anyone other then geeky techies. What matters to consumers are ecosystems. The WP ecosystem still needs some more key apps, but it has gained most of them and is progressing well.

    2) Android is not the easy route to riches. Yes it is the biggest smartphone OS, but Samsung own 95% of the profits and will not let go of them without a fight. LG, Sony, Huawei, and others all own that other 5% and want desperately to not be subsidising Android (Sony has had 8 quarters in a row of losses).

    3) Google were approached and they gave Nokia the trolls choice, join Android but use only Google services, that would destroy their profitable Navtec business. Microsoft cooperated instead and launched a partnership. Keep this in mind when thinking about a future Nokia Android phone – it would be far less profitable for Nokia then any other platform.

    4) Nokia is more than just smartphones, if they were not then Microsoft would likely have tried to buy them, Huawei for example could not buy them and expect NSN to continue to be a viable part of the business (a ~10 billion dollar joint venture).

    5) Their shareholders are very loyal and quite patriotic (the US commentaries really don’t understand this as in their view the short term always trumphs the long term), this is not only about money for them, Nokia would have to be certain to go out of business before they considered selling.

    6) Windows Phones current trajectory is good, Nokia own WP effectively and are crowding out their competitors. I would expect that we will see a further agreement if needed.

  • Mike

    Right everything is profitable except Lumia division. So they could ditch Windows and stop selling Lumia phones and then whole Nokia would be profitable. Have new phones by 2013Q4/2014Q1 running Meltemi, Sailfish/MeeGo and Android.

  • Ed_Luva

    I think that Microsoft just played Nokia for the fool by getting Nokia to sacrifice so much market share in furtherance of boosting WP7 and WP8. No unbiased CEO would have gone for such a plan, so Elop was installed. How can this be legitimate?

  • Cheers2

    WP is the best thing that ever happened to Nokia and vice versa. The reason Nokia Lost so much money is because they didn’t switch fast enough with the direction of the market few years ago. Nokia has started gaining money again and soon it will reach double digit market and become the world leader again. These things need time. Nokia Lumia FTW

  • vasras

    Please stop smoking crack. Look at the figures and the trajectories of development. WP8 has failed and so has Nokia.

    The likelihood of future success grows smaller by every minute.

  • cebula

    NOKIA start with MeeGo again!!!

  • Steven Zahl

    ELOP = FLOP

  • http://post404.com/ Randall “texrat” Arnold

    Too soon to speak in past tense.

  • http://post404.com/ Randall “texrat” Arnold

    I’ll only address your point about WP market share: your number is wrong.

  • http://www.tobiassolem.se/ Tobias Vincent Solem

    How ignorant and gullible at the same time can you be? Nokia has gone from being #1 for a decade to being one of the weakest mobile phone brands. Even in markets they SHOULD dominate (cheaper phones in poorer countries). Since Nokia solidly focused on WP they’ve been crashing.

  • chithanh

    It is not off by much. According to IDC, Windows Phone had 3.2% worldwide marketshare in Q1 2013.

    http://www.idc.com/getdoc.jsp?containerId=prUS24108913

    Do note that around 1/3 of these were still WP7 sales.

  • http://post404.com/ Randall “texrat” Arnold

    Try catching up. It’s almost 6%: http://www.networkworld.com/community/blog/windows-phone-us-market-share-growth-outpaces-android

    So the “cannot grow any more” claim is totally false. Someone owes me a canceled downvote.

  • Muffinman

    I’ll only address #2. Had Nokia gone the Jolla route, they could have taken full advantage of the Android ecosystem while retaining full control of their own services. A simple, efficient, feature rich OS like Meego, with the ability to run Android apps natively…that could be a very potent combination.

  • NMo9

    Comparing just US market share to counter WorldWide share? Sorry but can’t agree with that since US != World and views of the 95.5% of World’s population differs a lot from the 4.5% of US (Check iOS share for instance).

    Also, growing share by giving out devices for low-low prices isn’t a sound business plan.. It increases the short-term outlook & figures but messes up the long-term..