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In Nokia acquisition, Microsoft tries to catch up

Thursday - 9/5/2013, 1:36pm  ET

Nokia's new CEO Timo Ihamuotila, left, shakes hands with Chairman of the Board Risto Siilasmaa during a press conference for Microsoft and the Finnish mobile manufacturer Nokia in Espoo, Finland, on Tuesday, Sept. 3, 2013. Microsoft has announced a takeover of the Finnish mobile phone company Nokia in a deal reported to be worth some 5.44 billion euros (US dlrs 7.2 billion). (AP Photo / LEHTIKUVA, Markku Ulander) FINLAND OUT - NO SALES

MATTI HUUHTANEN
Associated Press

SAN FRANCISCO (AP) -- Microsoft's acquisition of Nokia's troubled smartphone business represents a daring $7.2 billion attempt by the software giant and a once-influential cellphone maker to catch up with the mobile computing revolution that threatens to leave them in the technological dust.

The deal announced late Monday offers both companies a chance to make up for lost time with a strategy to meld their software and hardware into a cohesive package, like rival Apple has done. But there are plenty of reasons to question whether the copycat approach will pay off.

Unlike Apple, Microsoft Corp. makes most of its money from software for personal computers -- a still-profitable franchise that has gradually been crumbling as smartphones and tablets supplant laptop and desktop machines. By some estimates, more than two-thirds of the computing devices being sold now are either smartphones or tablets, and there are few signs that trend will change during the next decade.

To complicate Microsoft's transition, the Redmond, Wash., company is being led by a lame duck. Microsoft CEO Steve Ballmer, who negotiated the Nokia deal, recently announced plans to retire within the next year in a tacit admission that the company needs a different leader to blaze new trails.

The managerial limbo raises even more doubts about whether Microsoft will be able to turn Nokia's phones into more effective weapons in a mobile-computing battle against devices powered by Google Inc.'s Android software and Apple Inc.'s iPhone and IPad.

"It's a three-horse race, and Microsoft knows it needs to come up with a more well-defined plan for mobile devices to catch up," said Darren Hayes, a computer science professor at Pace University in New York. "This was an essential acquisition for them."

The Nokia deal didn't go over well with investors who have already become weary of Microsoft's largely fruitless efforts to evolve into something more than a PC-dependent company.

Microsoft's stock shed $1.52, or 4.6 percent, to close Tuesday at $31.88. Nokia Corp.'s shares surged $1.22, or 31 percent, to finish at $5.12.

Nokia, a Finnish company, has seen its cellphone business unravel since Apple revolutionized the way people use handsets with the 2007 introduction of the iPhone. Nokia's problems grew worse in 2009 after Google began giving away its Android software to smartphone makers, spawning an array of sleek, low-cost alternatives.

In an attempt to bounce back, Nokia lured Stephen Elop away from Microsoft to become CEO nearly three years ago. That move has not worked out well for Nokia's shareholders. Even with Tuesday's rally, Nokia's stock remains about 40 percent below where it stood when Elop became CEO.

Despite those losses, Elop has emerged as a candidate to replace Ballmer as Microsoft's CEO. Elop is stepping down as Nokia's CEO to re-join Microsoft, where he will oversee the company's devices division. Nokia board Chairman Risto Siilasmaa will serve as the company's interim CEO.

Elop decided to abandon Nokia's old operating system in 2011 in favor of Microsoft's Windows system for phones. That move established Nokia as Microsoft's most important partner in the mobile device market. About four out of every five phones running on Windows are made by Nokia, according to the latest information from research firm International Data Corp.

Nokia accounted for such of large chunk of Windows phones largely because other manufacturers such as LG Electronics, Samsung Electronics and HTC have either been scrapping the system or de-emphasizing its use in favor of Android, said Forrester Research analyst Charles Golvin.

Microsoft still hopes to license its Windows software to other smartphone makers. In return, the company receives less than $10 in royalties for each Windows smartphone sold.

Although Nokia's line of Lumia phones has received some positive reviews, they still have not won over enough fans to establish Microsoft as a formidable force in smartphones.

Phones running on Windows have 4 percent of the worldwide market, leaving them a distant third to Android-powered devices at 79 percent and Apple's iPhone at 13 percent, according to IDC.

"We know we need to accelerate. We're not confused about that," Ballmer told investors and analysts Tuesday. "We need to be a company that provides a family of devices."

Microsoft is betting that it can develop a more appealing line of Windows phones if the hardware and software are more tightly wound together. That's a concept that propelled the success of Apple's iPhone and iPad, whose operating systems are tailored specifically for those devices. Apple also maintains a rigid screening process for applications.

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