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The Microsoft (Nasdaq: MSFT) Deal With Nokia Is Too Little Too Late

Anyone still wondering why Microsoft Corp. (Nasdaq: MSFT) Chief Executive Officer (CEO) Steve Ballmer is being forced into early retirement need look no further than the $7.2 billion Nokia Corp. (NYSE ADR: NOK) deal announced late Monday.

In a note to employees, Ballmer called the Microsoft-Nokia deal "a bold step into the future," but given the already cozy relationship between the two companies, it looks more like a leap of faith.

While the deal does come with some benefits for both companies, it's not going to have enough impact to reverse the eroding fortunes of either.

Rather than buy the entire company, Microsoft is buying Finland-based Nokia's substantial – and at one time market-leading – mobile phone business. The deal consummates a partnership forged in February 2011 in which Nokia agreed to base its flagship Lumia line of phones on Microsoft's Windows Phone operating system.

Given the precarious position of both companies in the smartphone sector of mobile – each is down to single-digit market share – perhaps such a deal was inevitable.

Money Morning Chief Investment Strategist Keith Fitz-Gerald certainly saw it coming.

"I think Microsoft is going to make a run at Nokia as a means of ensuring that the company doesn't lose its path to mobile markets," Fitz-Gerald wrote in an internal stock analysis in July, making the case that NOK was a buy at about $4 a share.

Still, given the fact that Redmond, WA-based Microsoft has slipped so far in terms of connected devices (from 90% in 2009 to just 25% now), Fitz-Gerald doesn't see any of the company's latest news – from the restructuring to Ballmer's forthcoming departure to the Nokia deal – as offering much hope for MSFT stock.

As Fitz-Gerald explained during a July 12 visit to FOX Business' "Cavuto," the company has been operating under Ballmer's "me-too" marketing plan ever since Windows – and the plan doesn't work.

The MSFT Quest for Market Share

One of the biggest mistakes Microsoft and Nokia both made was that they underestimated how Apple Inc. (Nasdaq: AAPL) would disrupt the mobile phone market. That mistake was compounded when Google Inc. (Nasdaq: GOOG) launched its free Android operating system in 2008.

It was the iPhone-Android juggernaut that inspired NOK and MSFT to pair up back in 2011. Back then the research firms Gartner and IDC made dramatic predictions that the partnership would deliver market share of 10% by 2013 and 19.5% by 2015, but I told you that wasn't going to happen.

Sure enough, the worldwide market share of Windows Phone has gone from 4.2% in 2010, before the deal, to a whopping 3.3% in Gartner's latest report for Q2 of 2013.

That doesn't mean that having both the hardware and software operations under one roof won't help Microsoft make a more competitive product, but that investors need to be wary of the company's wide-eyed predictions that it now will be able to triple its market share to 15% by 2018.

But even if Microsoft does manage to capture much more of the smartphone market as a result of the Nokia deal, it may not matter all that much…

Join the conversation. Click here to jump to comments…

  1. faust445 | September 4, 2013

    yeah, and who are you, God, to know for sure what the future holds….

    shill !

    • David Zeiler | September 4, 2013

      No one knows the future, but we can make some pretty informed guesses. No need for name calling.

  2. Am | September 7, 2013

    I wouldn't say these are well informed guesses. The windows phones look stronger every day, and people are simply burned out on apple and android devices. Not enough interesting change will quickly drive people to other markets, and that's what we've been seeing from Google and Apple.

    Microsoft/ Nok have budget phones like the 510 and high end phones like the 1020, the bandit is rumored to have some of the best specs of any phone on the market today.

    Personally at 5$ a share and with as much market diversity as NOK has id buy as large a portion as I fiscally could at this point.

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