How Microsoft Was Blackmailed into Acquiring Nokia: Unveiling the Inside Story

How much did Microsoft lose with Nokia?

$7.6 billion, 7,800 jobs, and 3 years of time. This is how much Microsoft lost on their worst acquisition of all time: Nokia. From an outside perspective, this was an obvious disaster just waiting to happen. Microsoft had taken a gamble with a legacy phone maker that was struggling to keep up with the modern world of smartphones. And unfortunately for Microsoft, things didn’t play out in their favor. 

But what if I told you that there was more to this story than just a misguided acquisition with a bunch of money? You see, the bleak state of Nokia isn’t just obvious in hindsight. It was obvious in real time as well. Investors were largely against the acquisition. 

On the day that the deal was finalized, Microsoft shares fell 6% losing the company $15 billion in market value or over twice the price of Nokia. Why do you ask? Well, the writing was already on the wall for Nokia. Not only was their market share and brand presence collapsing but they had lost $4 billion the previous year. 

So Microsoft was having to massively subsidize their operations just to own the company. Hearing this, you’re probably thinking that Microsoft must’ve been really desperate to get into the phone market, and you’re right, they were really desperate but what if I told you that there was more to this story? What if I told you that Microsoft was blackmailed into buying Nokia? 

Nothing straight up illegal went down, but Nokia very much leveraged its position and power over Microsoft within the phone market to force a $7.2 billion deal down their throats. 

So, join me as we take a look at how one of the biggest companies in the world got blackmailed into making the worst acquisition of their life. 

A DESPERATE PLUNGE

A Desperate Plunge Taking a look back, Microsoft’s foray into the smartphone industry can be traced all the way back to early 2004 to a project called Photon. Photon's goal was to create a mobile version of Windows that would be launched by the end of 2007. 

To be honest, Photon didn’t look all that great but contrary to popular belief Microsoft was very much ahead of the curve with smartphones. The problem though was that they didn’t stay ahead of the curve. Photon ended up being one of those projects that kept being delayed time after time because frankly, Photon was just a side project for Microsoft that they didn’t really care about. 

That was until 2007 when Apple would reveal the iPhone. On the outside, Microsoft would put up a brave front and act like they didn’t care about the iPhone. Steve Ballmer, the CEO of Microsoft at the time, would laugh at the iPhone and claim that it didn’t appeal to business customers. 

But while Microsoft acted like they didn’t care for PR purposes, internally, they were scrambling. They would reorganize their entire mobile team and start working on a “new operating system”. This was basically code for putting lipstick on the photon and shipping it as the next big thing but this itself took way longer than expected. 

In fact, they would end up rushing a beta version of this in 2009 dubbed Windows Mobile 6.5. Microsoft was very much hoping that the Windows name would carry this product, but that simply wasn’t enough. Users would see right through this crappy software and even Steven Ballmer would end up admitting that they screwed up.

 

You would think that this failure would lead to Microsoft reevaluating their position and approaching the smartphone market from a different approach but Microsoft simply doubled down. You see, Microsoft very much had tunnel vision. All they could see was that Apple and Google already had solid products on the market while they didn’t. 

So, their number one goal was to just to get onto the market as soon as possible and unfortunately, this led to yet another crappy launch with Windows Phone 7. During the announcement, Microsoft would proudly tell the world that it has struck deals with many of the world’s largest manufacturers, including Dell, Garmin, Asus, HTC, HP, LG, Samsung, Sony, and Toshiba. 

Microsoft was so confident in the Windows Phone 7 that they would stage a funeral for the iPhone. But when the Windows Phone 7 actually made it to the market, it was clear that Microsoft had cut a lot corners. The phone doesn't support copy pasting, custom ringtones, tethering, multi-tasking or even traditional notifications. 

Microsoft didn’t think they needed notifications because of their cool little windows tiles but the public didn’t agree and they weren’t the only ones. After seeing how the Windows Phone 7 turned out, half of Microsoft’s hardware partners would back out of their deal. And honestly, I think the only reason the other half moved forward was to stay on good terms with Microsoft but this wasn’t enough to cover for Microsoft’s shortcomings. 

To make things worse, developer support for Windows phones was atrocious. Developers would usually just start with iOS then move onto Android and then just skip Windows. And given that 3rd party apps make the smartphone experience for most people, a lack of 3rd party apps made the Windows Phone an absolute no go. 

If this was anyone else, this right here is where their journey within the smartphone market would’ve come to an end. But, since we’re talking about Microsoft, they would have the money and resources to throw a last hail mary. 

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HAIL MARY

Given the topic of the article, I’m sure you guessed that Nokia was the hail mary but this A Hail Mary played out a lot differently than you might think. You see, Microsoft didn’t just move to buy Nokia immediately. They didn’t really want to own Nokia, they just wanted a rock solid partnership and as such, they would send a trojan horse to Nokia in late 2010 in the form of Stephen Elop. 

Elop was the president of Microsoft’s business division which at the time was producing record profits, so he was in a pretty comfortable position. But for some reason, in September of 2010, Elop would take a job offer from Nokia to become their CEO. From the very beginning, this deal seemed fishy. 

Why would the leader of the largest division of the largest software company in the world leave to join a dying giant? As for Nokia, Elop was their first non-finnish CEO in their 145 year history and to give Elop this job, they had fired a man who had been with the company for 30 years. Surely, there was more to the story than just Stephen being a good candidate. 

Was Microsoft and Nokia secretly planning a partnership to take on Google and Apple? Well yes, that’s exactly what they were planning. Just a couple months after Stephen became CEO, they would publicly announce that Nokia was going to exclusively sell Windows Phones. Nokia was betting on it all. 

Instead of going down the proven path of selling Androids, Nokia had chosen to take a gamble with Windows but their allegiance to Microsoft went much deeper than just running Windows. Nokia would basically become a subsidiary of Microsoft supporting everything Microsoft does. 

For example, they would choose to integrate Bing instead of Google, they would integrate Bing Maps instead of Google Maps, and they would ditch their own app store in favor of the Windows Phone Store. They basically became the go-to Windows phone maker and they were decently rewarded for it. 

Pic Credit: Screenshot/The Verge

Unit sales would rocket to nearly 10 million per quarter, but in the grand scheme of things, this was still a massive step down for the phone giant that was Nokia. In fact, calling it a step down was an understatement as Nokia was getting obliterated. 

During Elop’s tenure, Nokia’s stock price crashed 62%, their mobile phone market share haved, their smartphone market share fell from 33% to 3%, and the company lost €4.9 billion. Likely the best evidence of just how bad things were was this leaked memo from Elop. Elop would compare Nokia to a burning oil platform and claim that Nokia had to jump into the icy water to have any chance at survival. 

This metaphorical jump involved partnering with Microsoft and going all in on the Windows Phone, but this wasn’t quite playing out as expected. What Nokia needed was a savior, and someone better to save them than Microsoft. 

Nokia had bet it all with Windows so it was only fair that Microsoft returned the favor and bet it all with Nokia. But, while that sounded nice on paper, Elop knew that he needed something more than just good faith to get Microsoft to buy into a growing money pit. And with that began the bid to sell off Nokia. 

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BLACKMAILED

Elop didn’t just jump straight into threatening Microsoft. Rather, it’s likely that he started off with a Motorola sort of approach. If you didn’t know, around this same time, Google would acquire Motorola for a ridiculous $12.5 billion. 

On paper, this was a terrible deal as Google would end up losing billions on this purchase but that’s just on paper. The reality is that Google gained something invaluable from Motorola: their over 20,000 granted and pending patents. It’s a really long story and in due course of time, I will bring a detailed article on this. But essentially Google would use these patents to save Android from litigation from Apple and Microsoft. 

Seeing this, Elop likely thought about pulling the same thing over on Microsoft given that Nokia had way more patents. Over 90,000 patents to be precise. But there was one fatal flaw with this strategy. Microsoft wasn’t desperate to save itself from a lawsuit like Google was. I mean, they were literally the ones that were suing Google with patents that they already had, so it was back to the drawing board. 

And that’s when Elop realized that while he may not be able to bribe Microsoft into buying Nokia, he could force their hand. You see, as Nokia became the go-to Windows phone manufacturer, other manufacturers had slowly stepped away. 

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In fact, by 2013, Nokia controlled 90% of the Windows phone market. So, why not threaten to move to Android? And that’s exactly how things played out. In early 2013, Nokia would publicly announce that they were considering a move to Android. To be honest, this was an easy out for Microsoft. 

They could’ve just let Nokia move to Android, accept that they had already lost the smartphone wars, and move on with their lives. But instead, Microsoft would freak out that they were about to lose their last chance to win smartphones and they would end up prematurely buying Nokia’s phone business for $7.2 billion. 

This was honestly a genius move by Elop as he would brilliantly make his way back to Microsoft as an executive after having a terrible run at Nokia. Elop is still at Microsoft, serving as their executive vice president. So, it looks like things played out pretty well for Elop, but the same could not be said for Microsoft or Nokia’s phone business. 

You see, just a couple months after Microsoft acquired Nokia, Microsoft would get a new CEO: Satya Nadella. From day one, Satya saw Nokia for exactly what it was: a desperate attempt by Steve Ballmer to salvage an already lost industry. 

So instead of focusing his efforts on Windows Phones, Satya would focus on the Azure and enterprise side of Microsoft. And once he had enough results to show shareholders from that side of Microsoft, he would ruthlessly incinerate Microsoft’s phone business. 

He would sell off the remaining parts of Nokia, lay off thousands of Nokia employees, and write off $7.6 billion in losses. Keep in mind, they only paid $7.2 billion for the business so they essentially wrote off the entire amount and another $400 million on top of that. 

Yeah, I don’t think it’s controversial to say that this was by far Microsoft's worst acquisition and it's all because they let the threat of Nokia switching to Android get to their head. Unlike Microsoft’s bet with Nokia, Google’s bet with Motorola may be their best bet of all time.

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