Microsoft gutted Nokia and left them without a chance

The Manchurian CEO did his job as ordered

Nokia Logo 63x40 Microsoft gutted Nokia and left them without a chanceIn one of the most brazen corporate raids in history, Microsoft (MSFT) took everything of value from Nokia (NOK), and have left a wounded beast to die in the cold. As a bonus, they also crippled one of the more promising open source projects out there, and got paid to do it.

The mainstream media is curiously absent in reporting what actually happened, the only detail that emerged worth a headline and sound bite is that Microsoft is paying Nokia $1 Billion as a sweetener. Like the rest of the deal, this is PR spin for public consumption. While technically true, it basically lying with numbers. Nokia doesn’t actually get a cent over the term of the agreement, and at least according to what sources tell SemiAccurate, Nokia is actually getting a worse deal than HTC, Samsung and the others.

Remember when we said that no one pays for Wince Phone 7? Well, it is true, MS is so desperate for anyone to care about WP7 that they will pay you to make phones with it. If you have the capability to churn out anything that hooks up to the GSM network, MS looks pretty good. The only problem comes when you want to sell those phones, the buying public is a little more discerning that Microsoft expected.

If you look at marketshare numbers, MS’s overall installed base in phones has been cut to about a third of what it was a year ago. WP7 has not only failed to stem the bleeding, it is getting steamrollered, ongoing market segment share is down from a year ago, before WP7 shipped. Ouch. MS is spending vast wads of cash to only lose 60+% of their admittedly meager base, numbers well hidden by their refusal to break out balances for the phone division, it is curiously lumped in with the Xbox cash flow, obliterating any hope for clarity. So, the savior OS, WP7 is now bleeding both cash and marketshare, getting all the press attention of an esoteric political speech, and unlikely to ever attain even market stagnation.

If you ask MS, they will tell you than the numbers are growing, but they will only talk raw shipments. To carriers, not to end users. And they don’t mention how both MS and Dell gave every employee a phone for free. If you subtract out the gifts and the unsold models, the raw numbers look bleak for Microsoft, so bleak you have to wonder why they bother, even discounting the massive kickback schemes. The halo has worn off, and for some reason, Microsoft no longer talks about any kind of sales figures.

The reason for this is that it is the company is looking to the future, phones are a long term play. They will tell you that the same thing happened with the XBox, so the naysayers are ignoring history. While this could be right, the XBox didn’t have the public, press, and most crucially, developer scorn that is heaped on WP7. It got off the ground and flew, albeit floating for a while on the hot air from the bonfires of cash piles burned by MS. WP7 is dropping like a rock, burnt cash notwithstanding.

That brings us back to Nokia and MS. Nokia is getting more than $1 Billion to dump Symbian and/or not move to Android. Fair enough. For the sake of argument, lets just say that WP7 ‘costs’ $10/phone to license, and MS kicks back anyone using it $15/phone in ‘bend over, smile, and think of the queen’ money. Sources tell SemiAccurate that these numbers are very close to what MS is shelling out, but we were asked to keep more exact numbers private to avoid identifying sources.

If you look at the numbers of smartphones shipped by Nokia, most of the numbers are pretty close to the ones quoted by Ars Technica, about 30 million units a quarter. Lets say Nokia loses a bit of marketshare because of the deal, and in 2012 only ships an average of 25 million WP7 or WP7.x phones a quarter, 100 million for the year. If each of those costs Nokia $10, Nokia is paying MS $1 Billion/year in licensing. MS kicks back $15/phone, or $1.5 Billion to everyone else, so if MS paid HTC/Samsung rates to Nokia, the Finnish company would have made that proverbial $1 Billion after 2 years by simply using the MS OS on over the counter rates. With the current setup, after 2 years, MS makes their $1 Billion back, and then Nokia is bleeding money.

If you look at the Businessweek article that first mentioned the $1 Billion number, there are two operative quotes. The first is that “Microsoft Corp. will pay Nokia Oyj more than $1 billion to promote and develop Windows-based handsets as part of their smartphone software agreement, according to two people with knowledge of the terms”. Great. Then a bit farther down, there is this quote, “Nokia‚Äôs royalty payments will help Redmond, Washington- based Microsoft make a profit on the accord even after the payments to Nokia, one person said.”

Never is there any attempt to compare or even rationalize the two statements, but the meaning is quite clear. Nokia is going to be in the red for this deal. MS ‘leaked’ the $1 Billion number to grab all sorts of headlines, and they got what they engineered, press spinning things for them. Fair enough, the press is generally composed of dumb sheep, and companies cynically use that all the time. The reality this time is that Nokia is paying MS a lot of money to use their OS, and both companies want that part buried. They got their wish this time. Baaaa.

The interesting part will come in when MS attempts to stop the subsidies to the other players, HTC, Samsung and the rest. Sources at those companies tell SemiAccurate that if there is no payment, the smiles stop. Cold. And sales are so laughably small right now, that is unlikely to change without a major market upheaval. Anyone want to bet something like that will come out of left field in the next couple of quarters? MS appears to be paying everyone other than Nokia a lot more than they are paying Nokia on a per phone basis, but no one seems to notice. Cue the sound of a veritable herd of sheep.

Nokia bravely spins this as a money saver by saying that they can cut R&D, and that will save them money on top of the money ‘given’ by MS. In a very unusual twist, this statement is probably true, or at least the savings part is. Unfortunately, this is one of the most cynical ploys a modern CEO bent on bleeding a company dry uses, and this time is is so blatant it almost hurts. What Elop, aka the Manchurian CEO, did is to cut long term R&D that the company needs to move forward in the future.

Successful companies over the long term invest heavily in R&D, and it pays off years down the road. Intel dumps billions of dollars in to R&D, and it pays off. IBM does things like Watson and other related deep technology research, and years later, they make money from it. HP used to do so, look at how much the memristor will likely bring in, but no more.

Mark Hurd gutted the company in a similar way, reducing the venerable and very productive HP Labs to nothing more than a shell, and putting the savings on the books. Wall Street saw big profits, and for the short and mid-term, there was no fallout at all. Although it was a bit earlier than planned, Hurd left long before the fall, leaving his successor with a shell backed by an empty development pipeline. The future for HP is all about making case badges and praying that no one disturbs the status quo on printer ink margins.

Nokia is the same. Elop gutted the R&D, destroyed any chance for Symbian to have a future, and sold off some of the best tools division in the industry, QT/Trolltech. Nokia’s future is sticking badges on phones, and if they are really ambitious, making cases for circuit boards that other people hand them. Anything innovative is basically locked out.

For a mere $1 Billion in press release funny money, MS not only destroyed one of their biggest competitors, Symbian, they also hamstrung one of the biggest proponents of Linux tools out there. QT is the basis for the Linux desktop called KDE, an environment that makes MS’s OS efforts look really bad. Two competitors in one shot, and over two years, the cost is effectively zero. How can it get better for Redmond?S|A

Part 2 to follow on SemiAccurate shortly

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 Microsoft gutted Nokia and left them without a chance

Charlie Demerjian

Roving engine of chaos and snide remarks at SemiAccurate
Charlie Demerjian is the founder of Stone Arch Networking Services and SemiAccurate.com. SemiAccurate.com is a technology news site; addressing hardware design, software selection, customization, securing and maintenance, with over one million views per month. He is a technologist and analyst specializing in semiconductors, system and network architecture. As head writer of SemiAccurate.com, he regularly advises writers, analysts, and industry executives on technical matters and long lead industry trends. Charlie is also a council member with Gerson Lehman Group.