Breaking: Microsoft to Buy Nokia Phones Division, Make Its Own Phones

Microsoft has agreed to buy Nokia's hardware division for $7.1 billion in cash. Microsoft's a company that makes its own phones now.

Specifically, the deal is for Nokia's Devices and Services division. Microsoft will also license Nokia's patent portfolio. 32,000 Nokia employees will join Microsoft as part of the deal. It comes about two and a half years after Nokia originally bet the farm by jumping all in with Microsoft and Windows Phone. The pairing has turned out some impressive hardware—most recently the Lumia 1020, which has the single best camera we've ever seen on a smartphone—but hasn't been nearly as popular as either side had hoped. The thinking here seems to be that by bringing Nokia hardware under its roof, Microsoft can create a truly unified experience, like Apple and the iPhone.

One Microsoft—But Too Late?

Microsoft has been making a big push into hardware over the past year or so. It announced the Surface just last June, and both models are due to see updates to current guts some time soon. It's got a major release for the Xbox One coming up which will see it push the Xbox further into the living room than any console to date. And now it's got Nokia, which completes the cycle, and means Microsoft builds every type of device you compute on (if you consider the Surface Pro a true PC). It's got all the pieces it needs to wall itself off and build the One Microsoft unified experience it's been eyeing for years. That is, if it can convince anyone to actually use its products.

Nokia's hardware is actually a fitting parallel to Microsoft's Surface division—wonderfully made hardware that simply doesn't (yet) have the software or installed base or feature set required to be truly competitive, and more importantly, to be good enough and compelling enough to tempt most people away from the established alternatives, be it Android and iPhone or traditional laptops and PCs.

Consider: All of Windows Phone only accounted for 3.7 percent of smartphone shipments in the second quarter of 2013. According to Microsoft's own projections, which it published this evening, it hopes for a 15 percent worldwide share by 2018. Microsoft is right that it's a long game, and there is still time to catch up, but those are meager goals over a five-year period. Five years is enough time for massive favorites to fall to pieces and be replaced by newcomers. Five years ago, the iPhone was still in its infancy, and RIM was unconcerned about its place on the throne—now the iPhone is the iPhone, and BlackBerry is begging anyone who will listen to buy it up and strip it down for parts.

Nokia has been rumored to be building a 10.1-inch tablet of its own, codenamed Sirius, and resembling the colorful Lumia phones. The tablet was said to be running Windows RT, but it's not clear how that will fit into Microsoft's roster of Surface tablets. Microsoft has been trying to consolidate as many devices into each other as possible, so it will be interesting to see what it does with a (presumably nicely designed) 10.1-inch tablet.

Does Anything Change?

To be clear: Microsoft won't stop licensing out Windows Phone software to other manufacturers, it'll just be making its own phones as well. This isn't unlike Google buying Motorola, but continuing to play nice(ish) with HTC and Samsung. Microsoft came out and said it's still dedicated to those partners, but if you thought the PC makers were mad when Microsoft announced the Surface as a direct competitor to them, just imagine how tough it's going to be after this to pry quality hardware out of HTC and Samsung, which were already lukewarm about supporting Windows Phone. In practice, this could mean Microsoft is now charged with building the only relevant Windows Phones that are being made.

One big detail that's buried in the documents released tonight is that Microsoft, predictably, gets the right to use Nokia's HERE maps across all of its devices. Previously, Nokia's maps and many of their features were exclusive to Nokia. The underpinnings (in part based on Nokia's Navteq) eventually powered all Windows Phones maps, but the ability to use the superior maps on all of its devices and services is a big win for Microsoft. It's also a further vote of non-confidence in Bing Maps, which could be on its way out. So that's one up on Apple, at least.

Similarly, many of Nokia's technologies that were being used to pitch Nokia Windows Phones—think camera tech, Windows Phone apps—could now, presumably, be folded into the broader Windows Phone world. There haven't been any announcements on that front yet, though.

One reason the deal makes sense for Microsoft is that it was getting less than $10 in software royalties per phone sold by Nokia, according to the company.

The New Plan

The news came late Monday night, in an open letter from Microsoft and Nokia CEOs Steve Ballmer and Stephen Elop (which comes with an adorable begging-for-a-sitcom "Steve & Stephen" sign-off). Ballmer also sent out an internal email, explaining the acquisition to Microsoft employees, along with a nuts-and-bolts Strategic Rationale document (PDF).

Elop will lead a new Devices team, and Julie Larson-Green (who briefly led the Windows division, before heading to Devices and Studios, which is handling Xbox One and Surface) will finish out her current projects before joining Elop's team.

Buying Nokia obviously has sweeping ramifications on the future of Microsoft, but in the near-term, it could give a clue as to the next CEO as well. Last week, Ballmer announced that he would be stepping down as CEO of Microsoft in the next year, once a successor had been found to help continue Microsoft's move into a devices and services company. And now it's bringing in Nokia devices and services wholesale, as well as Elop its CEO. It's early, obviously, but coming over to Microsoft in such an influential role seems to make him the favorite to succeed Ballmer.

So What's Left of Nokia?

That's interesting, actually. We mentioned earlier that Microsoft gets access to Here maps, as well as licensing Nokia's patents. Both of those divisions will remain under Nokia, and are enough to keep it relevant on their own. Mapping and patents aren't likely to be fading out any time soon, and uncoupling Here from Nokia hardware should have an especially positive effect on it. But the third, its network equipment business, might be the most interesting.

As BuzzFeed's John Herrman points out, Nokia Solutions and Networks is itself an expansive business, and one that isn't chasing after a revolution that might be too far gone to get a piece of. The division had also been struggling, until it decided to refocus itself on building mobile broadband infrastructure in late 2011. By that point, it had already purchased Motorola's wireless network equipment division, and gotten itself involved in a sweeping cell-phone spying scandal with its involvement with the Iranian government.

This is clearly where the new Nokia is focusing its energies. The deal with Microsoft had apparently been in the works since Mobile World Congress, and just last month, Nokia announced that it had completed acquiring Siemens's stake in NSN, then called Nokia Siemens Networks. It currently has a variety of contracts, including helping to build out mobile broadband in Iraq.

Anything Else?

Small scale, it will be interesting to see what happens to the design of Nokia/Microsoft phones. While a lot of the Nokia engineering team is joining Microsoft, it's unclear how much of the design team will be making the trip. A large part of Nokia's identity over the past few years has centered around the central Lumia design ethos, and it will be interesting to see how that meshes with Microsoft's own design sense. The Lumia always made perfect sense as a vessel for Windows Phone, but next to the Surface, which is beautiful, well built, and presumably the direction Microsoft is taking its hardware, it looks out of place.

More importantly, though, it's up in the air how much this even matters. Microsoft just dumped 7 billion dollars into floating the best hardware partner it had for Windows Phone. But it's uncertain if that changes anything as far as the phones and software and experience that show up in your hand. We haven't really seen any net benefit on the software end to the integration of Windows 8 and the Surface. The hardware was a more tailored to the general Windows 8 experience, but it's hard to see Microsoft reinventing the phone the way it's trying to merge the tablet and laptop with Surface.

At the very least, this means you'll continue to see pretty new Windows Phones every few months, but if that's all it is, and Microsoft can only muster up more of what it's been doing, it won't matter who's making the phones. This could end up simply keeping Microsoft in a game that's already stacked against it. Time will tell.

In the meantime, RIP little Nokia Ringtone. We knew you well.