Microsoft's US$7.5b lesson in Nokia blunder

New York

MICROSOFT Corp, which reported its biggest-ever quarterly loss last week, wrote off US$7.5 billion on Nokia's phone unit, which it had bought a little over a year ago for what it said was US$9.5 billion.

Considering that the deal included US$1.5 billion in cash, the write-off means Microsoft now values a business that once controlled 41 per cent of the global handset market at just a small fraction of the purchase price.

Thanks in large part to the huge accounting charge, Microsoft reported a US$3.2 billion loss for the fourth quarter. It was only the third loss in its history as a public company.

"If you were talking about any other industry, this would be considered a catastrophe that's the equivalent to a natural disaster," said Horace Dediu, who spent eight years at Nokia during its heyday and is now at the San Francisco research firm Clayton Christensen Institute, which studies disruptive technologies.

This being the technology business, Microsoft's still relatively new chief executive, Satya Nadella, gets credit for swiftly confronting reality and taking the hit to earnings. This may have been easier given that Mr Nadella opposed the proposed deal in an initial poll of top Microsoft officials.

But Steve Ballmer, his predecessor, was determined to push the deal through as a capstone to his long tenure as chief executive. Even after the deal was revised, and Mr Nadella issued a public statement supporting it, two directors voted against it. Both have since left the board.

Microsoft's spokesman, Frank Shaw, said it was normal for there to be internal debate over major acquisitions. Still, it's rare for there to be open board dissent once final terms of a deal have been struck.

Microsoft is also in good company. Google abandoned its foray into smartphones when it sold Motorola Mobility to Lenovo last year. But it has written off just US$378 million related to the US$12.5 billion Motorola acquisition. Amazon wrote off an even more modest US$170 million in October, acknowledging that its Fire phone was a flop.

"We try to learn from everything we do as we launch new opportunities," said Amazon's chief financial officer at the time, Thomas Szkutak, invoking the positive "learning" spin that technology companies typically put on failed ventures. But far more was at stake for Microsoft than for Google or Amazon, since the main point of the Nokia deal was to support Microsoft's Windows operating system, which, in turn, was a crucial element in Microsoft's "mobile first" strategy. Now both handset operating systems and hardware are pretty much global duopolies, with Google and Apple dominating software and Samsung and Apple dominating hardware. Microsoft has jettisoned the strategy.

Microsoft's "grand scheme was to have a single platform that ran on PCs, laptops, tablets and phones, and to be able to sell applications that run Windows", said Nicholas Economides, an economics professor at the Stern School of Business at New York University who specialises in network economics and electronic commerce. "That failed."

Mr Dediu said it was hard to put all the blame on Microsoft, since so many others had met a similar fate. "Most people didn't believe that such a catastrophe could occur this fast," he said. Microsoft "just couldn't imagine that a company that was once as strong and dominant as Nokia could have virtually no value."

Microsoft has now embarked on what Mr Nadella said is no less than a "reinvention" of the company. In an email to employees last month explaining the shift, Mr Nadella said: "We are moving from a strategy to grow a stand-alone phone business to a strategy to grow and create a vibrant Windows ecosystem."

Mr Shaw stressed that Microsoft would continue to manufacture Windows phones and other products, and that it would introduce a new line of Lumia phones this autumn. But they will be differentiated products tailored to narrower market segments, such as business customers concerned about security.

Perhaps most important, Mr Shaw said Microsoft recognised a pressing need to innovate: "If you miss the first wave, you have to hang on and then drive or anticipate the next wave. We want to be part of the next wave of disruption."

That, of course, is far easier said than done, especially since the next wave may already be upon us. Apple has made a big splash with its Apple Watch, which the company has said is exceeding sales projections. Microsoft introduced its own wearable computing device, the Microsoft Band, last year, months before Apple. NYT