Why Microsoft Cannot Afford to Let Nokia Fall Into Hands of Any Rival

Ok, now that Google bought struggling Motorola Mobility and its thick patents portofolio, the really big prize waiting to be picked is Nokia, badly undervalued due to horrendous management mistakes (see Elop Effect). So I speculated a day ago about who might want to buy Nokia, and also illustrated that due to its rather diverse interests in mobile hardware and software, whoever would buy Nokia would probably immediately divest some parts of it.

MICROSOFT SAW IT COMING

Well, the front runner in the race is no doubt Microsoft. And let me say a few words about Microsoft in mobile. Apple saw the shrinking computer, launched its 'Newton' what many call the first modern PDA (and while technically brilliant and loved by its users, the Newton was far ahead of its time and ended up a rare Apple commercial failure). But perhaps due to this failure, Apple was not too keen to get into the PDA-sibling category of smartphones, and when many of its rivals like Compaq, HP, Danger, Palm and Sharp went to smartphones, Apple rather went to re-invent the portable musicplayer market, with the iPod. Apple was a very late convert to the smartphones space, entering it in 2007.

How about Microsoft then? Microsoft had powered early PDAs and pocket PCs from an early 'palmtop PC' reduced version of its MS-DOS operating system more than two decades ago - used for example in the classic Hewlett-Packard LX100 palmtop PC. That OS then evolved to be a Windows PDA version and yes, now a decade ago, Microsoft entered the smartphone space, so Microsoft has been here for more than twice as long as Apple.

A DECADE OF.. FAILURE

Microsoft launched its smartphone operating system, that soon became known as Windows Mobile with HTC out of Taiwan (after ditching its first partner, UK based Sendo in a messy dispute that ended in a lengthy court battle that destroyed Sendo). Then Microsoft collected major handset makers to join the Microsoft family, and at one point Microsoft had four of the five biggest handset makers producing Microsoft Windows Mobile based smartphones - Samsung, Motorola, SonyEricsson and LG. Unfortunately for Microsoft, those four also made smartphones on other platforms and all of them made far more smartphones on Nokia's Symbian platform.

While the Windows Mobile based smartphones did record some success in the North American market, globally Microsoft was always only a bit-player. It was very briefly the worlds' second biggest smartphone OS, as Palm was losing market share and just before RIM took over from Microsoft. That moment of success did not last twelve months even. And how big was Microsoft's peak market share in smartphones? A measily 12%. This moment of glory was just prior to Apple launching the iPhone, and even at this time Nokia's Symbian outsold Windows Mobile by 4 to 1.

Then Apple came and changed everything. And the first casualty of the iPhone was not Nokia (nor the Blackberry) it was Palm. The second smartphone OS that started a rapid terminal decline after the iPhone came along was... Windows Mobile. It lost a third of its customers in less than two years, to the iPhone (this while Blackberry actually grew market share and Nokia only lost less than one in ten customers). The widely-held myth says that the iPhone killed Nokia's smartphones. That is a nice story but doesn't square with the facts. Nokia and Symbian didn't experience any greater loss than what was the normal gradual decline of its market share (Nokia invented the smartphone and started from 100%, so it was only going to go down) but it was not until Android came along, that Nokia and Symbian were severely hurt. And Android stalled Apple's growth as well. Did you notice that while the iPhone gobbled up market share on average more than two points of market share per quarter (on average) for the first two years, eight quarters - then in the next two years from Q3 of 2009 to Q2 of 2011, Apple has only managed to add 1.4 points of market share cumulatively in the past eight months. Apple's iPhone market share has been essentially flat. The dramatic growth by Apple was cut indeed by Android. It was not the iPhone that was killing Blackberry either - in the strong Apple growth period from 2007 to 2009 - the market share of RIM's Blackberry actually grew! Yes. It was not until Android came along, that Blackberry was damaged.

But yes, we don't deal with myths here, we deal with the facts. So lets return to Microsoft. Microsoft had 8% market share in smarphones in mid 2009 (with Nokia's Symbian now outselling Microsoft by 5 to 1). And then Microsoft did one of those 'only Steve Ballmer would do something this dickish' move. He decided to screw his smartphone maker partners all, and the whole Windows Mobile application developer community. After version after version of Windows Mobile updates and revisions, suddenly Microsoft announced that for the next version (to be called Windows Phone), there would be no migration path.

SUDDENLY: NO MIGRATION PATH

Most recent MBA graduates would be able to say that it is a bad move, especially if you try to build a platform, an ecosystem, or run an operating system across many brands of manufacturers. In fact Microsoft should have known better - it was the genious of the migration path from DOS to Windows, that allowed Microsoft to hold onto its world-leading OS market share from the early days of the PC, to the modern era that was ushered in by Apple's Macintosh. Windows was Microsoft's clone of the Mac OS, but the genious of the migration path (which at times was technically quite clumsy and took about a decade to complete) helped expand Microsoft's lead in PCs from one decade to three. And still today, we just heard from Canalys a few days ago, that Microsoft's Windows OS on the PC side delivers half of Microsoft's total profits and has a profit margin of over 70%. That is what you get if you bother to build a migration path from the world's leading platform.

Ah, but that was from the time of Bill Gates. It seems Steve Ballmer is far more interested in screwing everybody than doing whats right. No wonder Microsoft is called the Evil Empire. (and as a side-note, yes, Nokia had learned from the DOS-Windows transition, why do you think Nokia built a 'migration path' - yes - from the outgoing Symbian OS to the brand-spanking-new and hot MeeGo, the world's newest smartphone OS powering Nokia's N9, that now is the rage among tech enthusiasts)

How did the Microsoft announcement of no migration path go down with the handset providers? Not very well. Motorola was so disgusted, they left the Microsoft partnership totally, doing only Android. LG, which had only months earlier committed to 'strategic focus' of Microsoft Windows Mobile rather than Android - reversed its decision and now does more than 90% of its smartphones on Google's OS. HTC, Microsoft's launch customer and the smartphone maker that had always produced the most Microsoft based smarpthones was so upset they said they would not even release smartphones on the next edition of Windows Mobile (but would do some Windows Phone based smarpthones at some point in the future). And Samsung was not exactly wholeheartedly in the Microsoft camp, but they fast-forwarded their own bada OS which they launched a few months before Windows Phone.

So Microsoft had held 8% market share, then it announced it didn't bother with the migration path anymore and what happened? In less than a year, they lost five out of every eight customers they had. Their market share dived to 3%, by the time the first Windows Phone OS smartphones were ready to ship. (And Nokia's Symbian was now outselling Microsoft by 12 to 1).

Obviously we can see here, that Microsoft was never big in smartphones and where it had some success in sight, they then utterly messed up their chances. But maybe there is a silver lining with the brand new OS, Windows Phone, which is technically quite good, its users do like it and there are plenty of developers, apps etc. Maybe Microsoft could get back its market share with this new OS that has been sold for almost a year now. Surely the world's biggest OS maker could use some Microsoft magic, all that synergy across its platforms like PC Windows and Xbox etc, and use its deep pockets for marketing and promotion and create a comeback.

Not. Steve Ballmer said it himself, that a year ago Windows Phone OS had a market share which was 'tiny' and its current market share is still 'tiny'. How tiny is tiny? Five percent? Four percent? Three percent, the same as Windows Mobile had? Two percent? Cannot be, can it, one percent? Yes. Microsoft Windows Phone today, almost a year from launch, has been such an underwhelming market success, it has 1.1% market share of the global smartphone unit sales in Q2 of 2011. It is doing so badly, Microsoft's Windows Phone sales are not growing, they are declining! While the global smartphone market is exploding.

We can understand that Nokia's market share is tanking because of the Elop Effect. But Microsoft has been trying every trick in the book to boost Windows Phone success, from trying to convince the media that Microsoft (with Nokia) will be the third ecosystem (in fact they are now no better than 6th) to giving away new Microsoft Windows Phone based smartphones sold for a dollar this spring. Yet there were no takers.

Oh, and even after Burning Platfoms and all, the supposedly obsolete undesirable failing Nokia Symbian still manages to outsell all Windows Phone smartphones now, in the latest quarter by a ratio of 14 to 1. Even if we add the older Windows Mobile smartphones, the total 'Microsoft' market share of the two incompatible operating systems, has less than 2% of total smarpthone sales worldwide. Only one out of every 50 smartphones sold worldwide runs on any type of Microsoft software. After a decade if thats all you can do, that is failure pure and simple.

IF YOU CAN'T DEFEAT THEM..

So, Microsoft are smart people. If they answered honestly, they would have said that Nokia is by far the strongest smartphone maker - not the most desirable premium smartphone, that is obviously Apple, but worldwide, remember, just as recently as half a year ago, Nokia alone sold more smartphones than Apple and Samsung added together. Microsoft would have admitted that Symbian (and its migration path to MeeGo) is the (or now with Android, 'a') dominant platform and that no matter what Microsoft does, it is no match for it. But no CEO would be that stupid to admit their own systems are worse than rivals (except if your name is Stephen Elop)

I know there will be many who will yell that this is patently false. Again. I don't deal with myths here, I deal with facts. Microsoft's Windows Phone was launched at the start of Q4 of 2010. It is an all-new, from ground up fresh, modern smartphone OS that is optimized for smartphones and it was designed for touch-screen operation. It is supported by five of the ten biggest smarpthone makers and seven of the ten biggest 'dumbphone' makers.

Symbian released its (then) newest version called S^3 at the exact same time, at the start of Q4 of 2010. Symbian is a creaky old OS, it was created when there were no color screens on phones, far less touch screens. The system has gone through tedious costly time-consuming modifications to try to get it modernized and now the S^3 is finally touch-screen based. How many of Nokia's smartphones used it? Only three models, and only one of them the N8, was sold for the full three months of the quarter. This is the same Symbian that so many say is obsolete, undesirable, outdated, unwanted, hated by users etc. How did it do? Symbian S^3 sold 5 million copies in that quarter (which was only one sixth of Nokia's total smartphones that quarter).

And how long did it take Microsoft's army of HTC and LG and Samsung and SonyEricsson and ZTE and Huawei and all the others to sell 5 million units of Windows Phone smartphones? They did not do it in less time than Symbian S^3 - if they had, you could legitimately call Microsoft's OS the more successful one, right? Maybe the same amount of time? No. Maybe a month more time to sell 5 million units? No. How about one quarter longer? No. How about two quarters longer? No. Up to today, from the start of October to now, August 17, 2011, Microsoft has still not managed to sell 5 million cumulative units of Windows Phone based smarpthones! Nokia did it in 3 months, 92 days on only three handsets of which only one sold for the full thee months. By current trends it won't be until September of this year, that Microsoft finally sells its 5 millionths Windows Phone smartphone and matches the performance of that 'obsolete' Symbian update version. Makes you think, doesn't it?

Oh, you say Symbian S^3 not desirable? Nokia grew unit sales of smarpthones - yes - grew unit sales in Q4 - and this with price cuts? No. With a Nokia-record jump in average sales prices - Nokia was able to charge more for its smarpthones with this new OS. So Nokia did it with price cuts and marketing gimmicks? No, Nokia profitability of the smartphone unit exploded growing by 64% from the previous quarter. No marketing gimmicks, no handset discounts created the growth. The N8, with Symbian S^3 and the various other new smartphones were truly a hit phone (until the CEO decided to put an end to the success with the Elop Effect).

So, what can we learn from this? First, that Microsoft was smart enough to see the smartphone opportunity coming (arguably more smart than Apple at it). And Microsoft planted its seeds early, and recruited a big army to support its OS. Then Microsoft went about its business of being the Evil Empire that it is, and managed to upset and annoy just about every partner it ever had bankrupting some and just angering others. I should say for those who are not familiar with the details, that Microsoft's Windows Mobile and Windows Phone operating systems are traditional type of 'paid' licenses, so any manufacturer has to pay a license for every copy sold in any smartphone. But for example Nokia's Symbian is an open source foundation, it is free; Google's Android is also open source and free; Intel's (and until recently Nokia's migration path OS) MeeGo is also open source and free. And yes, Microsoft's operating systems are not open source of course, they are tightly controlled by Microsoft alone. So not only is Microsoft behaving like the bully it is, Microsoft fully expect you to pay them a nice licence fee for every copy of its OS, while all other major rival OS systems are royalty-free.

Then we can see, that even when the smartphone market was still relatively calm, before the current level of hypergrowth and hypercompetition (I counted back before the iPhone that only 7 of the Fortune Global 500 corporations were smarpthone makers; by 2009 it had exploded to 23 of the biggest companies on the planet - I doubt there has ever been any industry where 23 of the Fortune Global 500 have been involved in competition in the same industry, globally, and certainly no industry has expanded giant corporate rivals so rapidly in a two-year period) - even in the 'good old days' Microsoft was never able to exceed 12% market share and after the iPhone and Android came along, its been in low single digits at best.

So if you can't beat them, join them. There is one more way for Microsoft to get back into the game in smartphones. It wants to get those royalties from the licenses. It is not an advertising company like Google who can afford to give away software (or services like search, email etc) for free, but make it back with the advertising. And Microsoft is not a handset maker like Apple, RIM or Nokia, who could bundle the OS as part of their handset and make the money on the package. No, for Microsoft to have a significant business presense in smartphones, it has to have some handset vendor(s) willing to pay the license fees, who can also generate big unit sales numbers.

Some will say Stephen Elop was a mole, a Microsoft agent who came in and rigged the game, so Nokia would of course select Microsoft rather than Android or its own MeeGo OS. But it is possible, that the decision was made on facts and on merit and on the best available info at the time, and perhaps by a very slim margin, Microsoft's Windows Phone - as it seemed at the time when all looked peachy, and nobody knew yet how badly it was performing in the market - emerged as the winner in early February when the final decision was made. One could be cynical and say, that Elop did know, both how incredibly well Symbian's S^3 was doing, and how badly Windows Phone was failing, and he'd need to rush the decision before the facts came out (and further if you like conspiracy theories, that Elop also know MeeGo would defeat Windows Phone coming and going, so Elop had to rush his Burning Platfoms memo and delay MeeGo etc just to give Windows Phone some chance).

But we know that Microsoft has tried with every other player willing to dance with it and has failed. It now has Nokia under contract. To make sure Nokia cannot wiggle away, Steve Ballmer even paid Nokia 'billions' in marketing support funds - this angered the remaining Microsoft Windows Phone partners, many of whom struggle with losses, why would profit-generating Nokia be given money for joining Microsoft. But now the big billions paid or promised are a strong hook to keep Nokia in line with Microsoft.

WORLD RECORD MARKET SHARE COLLAPSE

So now we had the Elop Effect from February 11. Nokia was by a huge margin the world's biggest smartphone manufacturer at the time with 29% market share, literally more than 70% bigger than its nearest rival, Apple. Nokia was growing smartphone sales (but not as fast as the industry, so Nokia was gradually giving away some market share). Nokia was not in decline. Nokia was GROWING smartphone sales. Its average sales prices just jumped more than in any single quarter. Nokia's smarpthone revenues were growing strongly and its profits exploded by 64%. This very desirable successful smartphone maker giant dominated over its rivals far more than what Toyota does in cars, or Airbus in airplanes or Hewlett-Packard in personal computers etc.

Microsoft thought it was going to get "that" Nokia. That all it would take, is to switch the operating system and release those same spec cool Nokia phones with the new Microsoft Windows Phone software (this transition would take more than a year, technically as Microsoft needs different components from Qualcomm rather than Texas Instruments etc) and Microsoft would suddenly have one partner who alone made almost 3 out of every 10 smartphones sold worldwide. So even if most of Microsoft's other handset partners were 'miffed' by Microsoft's new love, they'd also chip in with a couple of million smarpthone sales, and Microsoft should have gained about a third of the market. Roughly what Android had at the time.

This would be similar to what Microsoft had with the Xbox. Its a far cry from the PC based Windows with over 80% market share but one third would be very good in the smartphone market, where Microsoft's own initiatives had netted low single digits by now. And if Microsoft held one third of the market in year 2012, then it would certainly motivate all of its staff to fight for every slice of the market to grab more by every means possible including lawsuits and penalty payments of patents etc.

Microsoft knows it made its fortunes riding the operating system for the personal computer, and for three decades, theirs was the bestselling OS in the PC market. Now the PC is migrating to smartphones, and the only way Microsoft can remain viable, is if they can have a (paid) slice of that. And they had Nokia's signature on the contract.

But then we have the Elop Effect. Nokia's market share in smartphones collapsed. In Q1, with only part of the period under the Elop Effect, Nokia's market share tumbled to 24%. But the very same rate continued and now in Q2, Nokia's market share has fallen to 15%. In a matter of less than five months, Nokia had taken its massive market share lead, and abandoned it to its rivals, falling so badly, two of its rivals have already passed it (Apple and Samsung) with Nokia in third place. In a very literal sense Nokia has lost almost half of its customer in less than two quarters. No market-leading brand has ever collapsed so totally. I am not talking only of technology brands here, so this is far worse than Palm or Motorola or Siemens for example in mobile phones - but any market share disaster ever - the launch of New Coke, the autombile brakes failures of Toyota, BP's image disaster with the Gulf Oil Spill last year, etc.

But its not over. Nokia has already warned that they are suffering even more. Right at the start of this quarter, Nokia announced across-the-board price cuts to its lines of phones. In the Quarterly Results, Nokia admitted that its reseller channel is 'reducing inventories' which is the marketing spin on what is openly said in many press stories that Nokia is in a reseller boycott (which is due to the Elop Effect). We heard just today from Investor's Business Daily, reporting from China, that Nokia franchise stores are struggling so much in making any business selling Nokia branded phones, that they have started to sell competitor branded phones! In Nokia stores! This is like going to a McDonald's restaurant and because nobody is willing to buy their Big Macs and Fries, they have started to stock Burger King hamburgers and Fries! This is surely the end of a once-proud brand - China is by far the world's biggest mobile phone market and Nokia was by far its bestselling phone and its bestselling smartphone. When the reseller boycott is so severe, that your own branded, franchise stores stop selling your goods and start to sell rival brands, that is total retail collapse!

So the trend is inevitable. Even Nokia itself admits their sales are falling. The Nokia market share will continue to plummet, it will be near 11% by the end of Q3 and down to about 7% by the end of this year. By then Nokia will have abandoned three quarters of its market to its rivals, due to self-inflicted wounds. Never in the history of business, has any leading global brand collapsed as comprehensively as Nokia is now doing. This is history in the making, pay attention. This is a story that will be studied in MBA classes for the rest of this century as one of the great massacres, or indeed, suicides of a brand.

But in a perfect world, that should be the worst of it, from Microsoft's point of view. They had hoped to get Nokia at near 30% market share. Now if Nokia bottoms out at around 7% it is obviously far less than they had hoped, but then the new Microsoft based Windows Phone smartphones would start to ship and sell, and from Q1 of next year, the recovery should start. And in any case, even if Nokia only limps in at 7% at the end of 2011, that is still seven times better than what Microsoft is able to do by itself.

Without Nokia, there is no path left for Microsoft. They are now on life-support, the only thing keeping Windows Phone alive, is that promise of those first 'Nokia' branded (but actually Compal-manufactured Taiwanese clone) smartphones that start to ship and sell in modest numbers before Christmas. But if you give Steve Ballmer a sick Nokia with 7% market share, and use the Nokia brand and carrier relationships and ecosystem support etc, with full Microsoft marketing and sales support, some recovery 'has' to happen. Will it grow to 8% or 10% or 12%, depends on what color glasses you wear, but yes, Microsoft can fairly expect some recovery and they might even under extremely rosy scenarios recover to what Microsoft had at the peak of Windows Mobile, maybe. 12% on the very rosy upside scenario. Maybe. And its clear that this smartphone market is too hot now, weak players will be exiting, like Motorola and Palm gone, Nokia now on the ropes and RIM quite possibly next, it will be also a game of attrition. And Microsoft has extremely deep pockets to remain in that fight for months, quarters, years, even decades probably.

What Microsoft needs is to remain in the game now. Now.

ELOP WOULD BE FIRED

So, the key to Microsoft and its Nokia fantasy, is for Nokia to 'stay the course'. To not give up on Microsoft. For Elop to keep steering that ship now towards the 'inevitable' Windows Phone.

And all would be well, if Nokia was reasonably healthy. But the Elop Effect was far bigger than certainly Stephen Elop himself expected (he admits that). And an unanticipated side-effect is that Nokia's featurephones unit also is losing sales and went from making profits to generating a loss. While they were not directly 'impacted' by the Microsoft announcement (the featurephones are not powerful enough to run the Microsoft operating system) and the Burning Platforms memo also did not really touch much on Nokia's featurephones, still the brand was severly damaged, sales fell severely, and now the featurephones unit is also generating a loss. And the networks unit, NokiaSiemens Networks, is also generating a loss. So while Elop bravely promised profits for Q2 in the single digits, he then had to come back with a profit warning only weeks later. And yes, in Q2, Nokia reported a big loss. But again Elop in Q2 results promised near zero profits/losses. That won't happen. And now they've slashed prices for Q3, to me that means bigger losses coming in Q3. Expect another profit warning any day now. And the stock market is punishing this performance severely.

The first five months of Stephen Elop's stewardship were received very warmly by Nokia shareholders. The Nokia share price climbed 11% from the day Elop took office to February 10. But after the Elop Effect, to the bottom last week, Nokia share price had then fallen more than 59%. (Now Nokia share price is wildly climbing due to take-over speculation).

I did my analysis of what kind of assets Nokia has and what kind of rivals might want to buy parts of Nokia. The big catalyst was the Google purchase of Motorola, especially for Motorola's big patent portfolio in mobile. Nokia's patent portfolio is even bigger, and its other assets are far more valuable but Nokia was valued on market cap only about 22 Billion dollars when Motorola was sold for 12.5 Billion. Many analysts said Nokia was a far better bargain, albeit a complex one where the new owner would need to sort out the mess of what to keep and what to sell.

And here is the danger to Microsoft. Any other buyer - any other - in fact any sane unbiased person - would look at Elop's recent actions (not the Elop Effect but after it) and look at the choice of Microsoft Windows Phone vs MeeGo, and conclude that Elop has not been acting in Nokia's best interest, in fact Elop the new CEO has made decisions severely damaging to Nokia's value - and will immediately fire Elop. And then, either provide full global launch of all MeeGo handsets in every market while abandoning Microsoft outright; or perhaps in the 'best case' for Microsoft, only launch MeeGo in every market immediately on every possible handset, and reserve the possibility to launch some Microsoft handsets later.

Regardless, if MeeGo is now launched on the hot new N9, not in tiny countries like Luxembourg, New Zealand, UAE and Norway, but in big smartphone markets like the USA, UK, Germany, France, China, India etc - then the newly acquired owner of Nokia will suddenly have on their hands the hottest phone of the planet (until Apple's iPhone 5 launches, obviously). The new buyer of Nokia gains an instant 'Razr Moment' for their new purchase. And as Nokia has several MeeGo handsets already fully designed and ready to roll, including the 'big brother' to the N9, the N950 - then these MeeGo handsets alone will turn Nokia's loss-making smartphones unit into making profits.

Remember, back in Q4 of last year, three handsets using Symbian's S^3 - Symbian - sold 5 million units and jumped Nokia's profits of the smartphone unit by 64%. That was not a hot phone, it was a long-awaited phone that had been hot half a year earlier. And nobody was going gaga over Symbian, not even its S^3 edition last Christmas. But now the tech press love the N9 and MeeGo. If MeeGo is given a fair launch, using Nokia's global reseller channels, in all major markets, with honest Nokia marketing push (and supported wholeheartedly by its CEO) then it will be a success. But even if you doubt that, at least if the CEO finds that the press love the new phone - the CEO cannot say he won't release it in Nokia's biggest markets. That even if the N9 is a success, he will never authorize another MeeGo phone. That is yes, in Microsoft's best interest, but it is not in Nokia's best interest. And Elop has not been acting in Nokia's best interest with MeeGo this summer. That is the primary reason why he will be fired on the day the new owners take over Nokia.

And any new interim CEO of Nokia will manage to turn the hot N9 into a big global success. It is produced in Nokia's own factories, so Nokia can control how many to make. It uses Nokia's standard components and runs on Texas Instruments chips, so no retooling is needed and Nokia gains in any increase in sales, in any bulk supplier discounts etc. This is what American managers call a 'no-brainer'. Of course if the market craves the N9 - and it is going to be manufactured anyway and sold in 29 countries, it launches in September - only a fool CEO would then say, but I wont' sell it in the best and biggest markets.

BIDDING WAR

So, any other prospective buyer of Nokia can approach the possibilty of buying Nokia 'rationally' by the honest real merits. What is the patent portolio worth. What is Navteq worth. What are Nokia's factories worth, what of its global reseller and carrier relationships, etc. But Microsoft cannot. For Microsoft this is the do-or-die issue. They became the biggest software company riding the PC wave which is now coming to an end during this decade. The next wave is smartphones. Already from Q4 of 2010, more smartphones were sold than all PCs of any kind and now the gap is only growing. This decade belongs to the smartphones. If Microsoft intends to be a big player in computer software still at the end of this decade, they have to be in smartphones. They have played all their previous cards and failed. Their last hand is now Nokia, and because of the Elop Effect, suddenly what looked so promising in February is in danger of slipping away.

So Microsoft cannot afford to lose Nokia. If Microsoft were to buy Nokia today, they could dispense with the pretend and just make Elop the President of the Nokia division of Microsoft and take full control of the smartphones and spin off most of the other parts they don't want or need. Forget about other Microsoft partners. Then there would be no suspense and who cares if Nokia's 'Symbian' market share hits zero by Q4. Microsoft would simply say, this is a transition, wait for hte new phones next year, and judge us by that. Nokia was too weak to do it alone, but now with deep Microsoft pockets, the new smartphones will be a big hit (and they'll say, like Xbox, and the skeptical press may add, or like Kin or like Zune). If Microsoft buys Nokia, they simply take over the company fully and then run Nokia smartphones the way Ballmer (and Elop) always wanted. And they write off this year.

But anyone else who would buy Nokia, would see the huge potential of simply MeeGo, which is now. The first N9 phones ship in September. The N950 is ready to ship now as well. If only the hot N9 and N950 did as well as the N8 and Symbian S^3 did last year - only as well - then Nokia's smartphone unit would generate a bonus income of 2.5 Billion dollars (this is income Elop mostly refuses to take in by refusing to sell the N9 and N950) and even if we use the overall smartphone unit profitability from Q4 (the profitabilty of the N8 and S^3 devices was certainly much better) even at that modest profitability level, the current smartphone unit losses would be eliminated! What moron CEO refuses that? Remember, Elop has no Microsoft phones to sell now. Why on earth would he not release MeeGo in every market, as Nokia is bleeding and desperate to find any profits?

Stephen Elop is no dummy. He knows if MeeGo is given a global launch even with only the N9 - an honest true Nokia designed Nokia-manufactured smartphone, it will totally outshine and outsell any Nokia branded Compal-manufactured first, rushed-to-the-market, very likely very buggy Microsoft-phone. And Nokia can't even secure production nor sales commitments from carriers to launch the first Windows phone broadly.

Elop has pursued his Microsoft strategy meticulously. He also knows this calculation. He is personally very aware of the finer points of large corporate takeovers, in his five months as CEO of Macromedia, it was Elop who orchestrated the companys' sale to Adobe.

So Elop knows, if Microsoft buys Nokia, Elop gets to keep his toy (Nokia), he will end up owning the future of Microsoft and unless he messes up - and in Microsoft's eyes so far he has not done anything wrong - he is the front-runner to replace Steve Ballmer as Microsoft's next CEO. 

And Elop also knows, any other buyer to Nokia now, and Elop is fired instantly, withouth mercy. While no doubt he'll have his old job back at Microsoft, he is now so heavily tainted goods, the rest of his life he will be known for the Elop Effect that destroyed Nokia. No matter what heroics he might achieve in his later career, he will be hounded by that reputation as the man who made the biggest management blunder of any career. His name will be synonymous with total executive disaster. So even if he were to have a comfy job, his life of expecting to be the next Bill Gates or Steve Jobs in the media spotlight will be extinguished. And as Microsoft would lose its mobile path, Elop would also be stuck in a company whose best days were behind it, and he'd have no chance of succeeding Ballmer as CEO.

So what does this mean? Elop is very biased. If any potential suitor were to approach Nokia trying to acquire it quietly, Elop will instantly inform Ballmer and make sure that Microsoft jumps in immediately, and then we'll have an open bidding war.

Microsoft doesn't want the bloated Nokia as it exists now. They preferred that Elop sell off NokiaSiemens Networks (one half of Nokia's employees and a third of its revenue). And ideally, also to sell off the dumbphones handset unit. And fire off tons of unnecessary Symbian etc programmers (as Elop has been doing). Meanwhile Ballmer is a businessman. He doesn't want to pay more for Nokia than necessary. So the continuous dive of Nokia share price this spring has been good news for Ballmer, thinking he can soon buy Nokia at a big discount. In a perfect world, he doesn't really want to own Nokia, Ballmer would prefer that Microsoft makes all the profits in the software and Nokia makes slim profits as a box-mover, just like say Dell was in the PC world as a Windows PC provider. But if needed, Ballmer will move to buy Nokia.

So now we have an interesting dynamic. If anyone other-than-Microsoft makes a move for Nokia, then I am 100% sure, Microsoft will instantly make a better offer and we'll get into a bidding war. Who has the pockets, who has the desire. These things then get often into matters of ego etc, but it should be interesting.

But I do not see Microsoft buying Nokia secretly like Google did with Motorola. I think even Ballmer and Elop know, that if they tried that, they (and Nokia Chairman Jorma Ollila) would be investigated for all sorts of insider trading, share price manipulation etc. And with national pride at stake, in addition to Wall Street (and Stockholm) the Nokia share is traded on the Helsinki stock exchange, and with Europe involved - Nokia is a big employer in many European countries and is considered Europe's biggest IT/tech company, Microsoft could face nasty EU investigations as well. 

But Ballmer is hoping that Nokia can survive to next year, and the new Windows Phone based Nokia smartphones are released, then most of the troubles would have passed. But the situation is too dire. Nokia will see a new profit warning within a few days or weeks. Then the Q3 results will come out with ever bigger losses in all units. Then the market shares come out for Q3 and Nokia will have fallen to about 5th place in smartphones and lost its global lead in dumbhpones to Samsung. By Q4 Nokia is deeply in the red and seemingly disappearing on every measure. If a buyer does not appear soon, I think the pessimists will win the day, and Nokia's share price will resume its steep dive. But I am not a financial analyst and this is not a Wall Street analysis blog haha..

So that is how I see Microsoft's conundrum. They did see the big smartphone opportunity and they made many plays into it, with ever diminishing success. Now they have played their last hand, that of Nokia and while it looked strong in February, now that Google bought Motorola, it seems very likely that very soon we'll hear someone is considering a Nokia takeover. And if so, Microsoft cannot stay on the sidelines. Then we're in for a bidding war. And no matter how we slice it, Nokia as we know it, will be history. And in a personal story, Stephen Elop's career hangs in that balance, if he brings Nokia to Microsoft, he is the hero and next CEO of Microsoft and Nokia the brand will soon be forgotten as yet another casualty of the rapidly evolving tech industry. Or else he can't bring Nokia to Microsoft, it goes to someone else, and Elop is the biggest laughing stock in all of corporate management with his name synoynmous with catastrophic self-inflicted suicidal destruction of the company you were hired to run. The Ninja assassin with a kamikazi complex turned suicide-bomber. And he cannot use the Nazi defense from the Nuremberg Trials, that 'he was just following orders' because he was not supposed to follow orders from Microsoft. Elop was hired to run Nokia. Not to ruin Nokia.

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