Microsoft's $7.2B Nokia mistake

Just over a week after Microsoft announces plans to replace CEO Steve Ballmer the company announced it .  For those looking forward to big changes at Microsoft this was like sticking a pin in the big party balloon!

Everyone knows that Microsoft"s future is at risk now that PC sales are declining globally at nearly 10% - with developing markets shifting even faster to mobile devices than the USA.  And Microsoft has been the perpetual loser in mobile devices; late to market and with a product that is not a game changer and has only .

But, despite this grim reality, Microsoft has doubled-down (that"s doubled its bet for non-gamblers) on its Windows 8 OS strategy, and continues to play "bet the company".  Nokia"s global market share has shriveled to 15% (from 40%) since former Microsoft exec-turned-Nokia-CEO Stephen Elop committed the company to Windows 8.  Because other Microsoft ecosystem companies like HP, Acer and HP have been slow to bring out Win 8 devices, Nokia has 90% of the miniscule market that is Win 8 phones.  So this acquisition brings in-house a much deeper commitment to spending on an effort to defend & extend Microsoft"s declining O/S products.

As I , the #1 action we could expect from a Ballmer-led Microsoft is pouring more resources into fighting market leaders iOS and Android - an unwinnable war.  Previously there was the $8.5B Skype and the $400M Nook, and now a $7.2B Nokia.  And as 32,000 Nokia employees join Microsoft losses will surely continue to rise.  While Microsoft has a lot of cash - spending it at this rate, it won"t last long!

Some folks think this acquisition will make Microsoft more like Apple, because it now will have both hardware and software which in some ways is like Apple"s iPhone.  The hope is for Apple-like sales and margins soon.  But, unfortunately, Google bought Motorola months ago and we"ve seen that such revenue and profit growth are much harder to achieve than simply making an acquisition.  And Android products are much more popular than Win8.  Simply combining Microsoft and Nokia does not change the fact that Win8 products are very late to market, and not very desirable.

Some have postulated that buying Nokia was a way to solve the Microsoft CEO succession question, positioning Mr. Elop for Mr. Ballmer"s job.  While that outcome does seem likely, it would be one of the most expensive recruiting efforts of all time.  The only reason for Mr. Elop to be made Microsoft CEO is his historical company relationship, not performance.  And that makes Mr. Elop is exactly the wrong person for the Microsoft CEO job!

In October, 2010 when Mr. Elop took over Nokia I pointed out that he was the wrong person for that job - and he would destroy Nokia by making it a "Microsoft shop" with a Microsoft strategy.  Since then sales are down, profits have evaporated, shareholders are in revolt and the only good news has been selling the dying company to Microsoft!  That"s not exactly the best CEO legacy.

Mr. Elop"s job today is to sell more Win8 mobile devices.  Were he to be made Microsoft CEO it is likely he would continue to think that is his primary job - just as Mr. Ballmer has believed.  Neither CEO has shown any ability to realize that the market has already shifted, that there are two leaders far, far in front with brand image, products, apps, developers, partners, distribution, market share, sales and profits. And it is impossible for Microsoft to now catch up.

It is for good reason that short-term traders pushed down Microsoft"s share value after the acquisition was announced.  It is clear that current CEO Ballmer and Microsoft"s Board are still stuck fighting the last war.  Still trying to resurrect the Windows and Office businesses to previous glory.  Many market anallysts see this as the last great effort to make Ballmer"s bet-the-company on Windows 8 pay off.  But that"s a bet which every month is showing longer and longer odds.

Microsoft is not dead.  And Microsoft is not without the ability to turn around.  But it won"t happen unless the Board recognizes it needs to steer Microsoft in a vastly different direction, reduce (rather than increase) investments in Win8 (and its devices,) and create a vision for 2020 where Microsoft is highly relevant to customers.  So far, we"re seeing all the wrong moves.

(Adam hartung is the managing director at Spark Partners.)

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