Microsoft's Ill-Starred Nordic Adventures
Almost 14 years ago, Microsoft announceda major joint venture with a global leader in mobile communications, a company headquartered in a small Nordic country. The goal, according to Chief Executive Officer Steve Ballmer, was to get all 30 million users of Microsoft's e-mail platform to use the company's software on their mobile phones.
The partner company was called Ericsson, and it was a major producer of mobile handsets. My first mobile phone, bought in Russia in 1998, was an Ericsson. It had a 3-inch antenna, and it did not fit in my jeans pocket.
Ericsson Microsoft Mobile Venture AB fell apart in 2001. Microsoft never even paid for its 30 percent stake. Having tried working with Microsoft, Ericsson elected instead to team up with Sony to make mobile phones that looked more like consumer products than like telecommunications devices.
In 2011, that partnership, too, came to an end, with Sony buying Ericsson out for $1.5 billion. The partnership had garnered only a 5 percent share of the global smartphone market, in part because its phones ran Symbian and Windows Mobile, both dead-end systems that lost out to Apple's iOS and Google's Android.
Just before Ericsson sold its share in the business, Sony Ericsson moved to Android. In the 2013 financial year, Sony Mobile -- the renamed former joint venture -- was still losing money but hoping, after some serous cost-cutting, that its Xperia range would carry it into the black.
Ericsson, for its part, has never regretted moving away from handsets to concentrate on mobile network equipment. It boasts that 40 percent of the world's mobile traffic runs through networks that it supplied. In 2012, it made a profit of almost $900 million. The consumer business is forgotten like a bad dream.
By sellingits mobile phone business to Microsoft, another Nordic company, Nokia, is following in Ericsson's footsteps. There is little doubt that the Finns can repeat their Swedish neighbors' success. Nokia recently bought Germany's Siemens out of their joint venture, Nokia Siemens Networks, another global leader in network equipment, focusing on mobile broadband. The business lost money last year, but only because of large restructuring charges. In the second quarter of 2013, it showed a profit of about $10 million.
In terms of importance to Nokia, the infrastructure business, with 2012 sales of $18.2 billion, comes a close second to handsets, which generated $20.7 billion. The phone division, however, lost almost $1.5 billion last year. Along with the growing but risky smartphone business, Microsoft has bought the Finnish company's rapidly deteriorating line of "feature phones" -- cheap outdated devices with actual buttons. Last year, the unit sales of these Nokia phones decreased 20 percent compared to 2011, and the decline continues.
Microsoft's role is similar to that of Sony's in the Ericsson deal, except it is paying almost five times as much for a smaller, 3.3 percent share of the smartphone market. Nokia CEO Stephen Elop, who once worked for Microsoft and will return to the Redmond company to run the new mobile phone division, has done a great job for the Finnish company's shareholders.
Unlike Sony, Microsoft is not a consumer-products company. It has been most successful selling its products to businesses, from computer manufacturers to corporate clients buying licenses for Microsoft Office software. Instead of betting on the most successful operating system, Android, it is intent on pushing its own Windows Phone, ignored by many application developers because of its tiny market share. Ballmer has locked his successor into a money-losing business with a headcount of more than 32,000 people, operating in a highly competitive market where Microsoft is the underdog.
As for Nokia, it can breathe a sigh of relief. Gone are the (recent) days when its sales equaled 20 percent of Finland's gross domestic product. Also gone are the losses, offloaded on Microsoft with its $70 billion in cash. Let he who can afford it play the game.
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Leonid Bershidsky at email@example.com