Microsoft / Nokia – Quick Win

Synergies will be pretty easy to achieve.

• With the Chinese finally signing off on the deal, Microsoft has finally managed to close its purchase of the Nokia handset business.
• Now that handsets are now part of Microsoft, the focus will now move to profitability and how the $600m of synergies will be achieved before the end of 2015.
• It is not obvious how Microsoft can wring synergies out Nokia by taking ownership but the answer lies in the nature of their relationship as separate entities.
• As part of the original deal struck in 2011, Nokia agreed to pay Microsoft a licence fee for Windows Phone but actually got far more in return every time it shipped a handset.
• RFM research suggests that Nokia was paying $10 per unit for the software but was receiving $20 per unit in terms of payments and marketing support.
• This means that Microsoft was losing $10 every time Nokia shipped a device.
• This created a disincentive for Microsoft to invest in Windows Phone and was one of the motivations for Microsoft to acquire the business.
• Hence, in order to realise $600m of savings, Microsoft simply needs to reach a 60m unit annual run rate or 15m per quarter.
• Even after adjusting forecasts downwards to reflect a weak Q1, I am still expecting Microsoft to hit 15m in quarterly shipments in Q4 this year.
• Consequently, I fully expect Microsoft to announce that synergies have been achieved well ahead of target even if it does not really mean anything.
• The real value in this acquisition will come from the fact that Microsoft now has an incentive to invest in this platform and push its appeal both far and wide.
• Microsoft is still struggling to do this as most consumers are either unaware of the platform or have no clue why they should buy it.
• With this hurdle out of the way and a new personality at the top, I have hope that this year will see these issues taken properly in hand.
• Hence, I expect Windows Phone to gain steady share during 2014E and tablet PCs to gain some traction in H2 2014.
• Both of these could add further increase expectations for Microsoft which should keep the current rally going.
• Microsoft is up there with Yahoo! and Google as my favourite mobile ecosystem plays.