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What Impact Will It Have on Korean Smartphone Manufacturers?
Microsoft’s Buyout of Nokia
What Impact Will It Have on Korean Smartphone Manufacturers?
  • By matthew
  • September 4, 2013, 08:41
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Microsoft took over the mobile phone business unit of Nokia on September 3 at a price of 5.44 billion Euros (US$7.17 billion). IT industry experts are paying keen attention to the trump card played by the world’s largest software company.  

Nokia is the second largest mobile phone supplier in the world, though it has been overtaken by Samsung Electronics and Apple in the smartphone race. Through the acquisition, the global mobile phone industry is expected to see the four competing blocs of Apple, Samsung Electronics, Microsoft and Nokia, and Google and Motorola vying fiercely for market leadership.

Nokia sold over seven million Lumia Windows phones in the second quarter of this year. Although it has slid out of the top five in smartphone rankings, it is still the second-largest company in the world when the feature phone sales volume is taken into account, selling more than 60 million handsets a quarter. Its brand awareness is still very high in Europe, Africa, and the Middle East, and its annual production capacity amounts to 200-400 million units. If the Finnish company succeeds in selling the same amount of smartphones, Microsoft can catch up with Apple in the mobile operating system market in no time. This is why Microsoft decided not to dismiss any employee of Nokia. 

All of the three powerhouses excluding Samsung Electronics have vertically integrated their software and hardware business units. Apple manufactures iPhones and iPads using its own operating system iOS. Google, which has the Android operating system, acquired Motorola two years ago to bolster the hardware side. Microsoft is following in Google’s footsteps now. 

​Samsung Electronics, due to its relatively weaker software capabilities, has produced Android smartphones in cooperation with Google. The collaboration has worked so well that they top the global smartphone and mobile OS markets, respectively. Even though Google has launched the Moto X through Motorola, it is putting more weight on its cooperation with Samsung Electronics so far. 

Microsoft is hoping that the Google-Samsung alliance will loosen with time, as Nokia alone does not suffice for it to get over Google and Apple. Microsoft is expecting that Samsung Electronics will manufacture and supply more Windows phones via Samsung Electronics. Consequently, Microsoft wants Samsung Electronics to manufacture and supply a certain amount of Microsoft's Windows phones each year.

At least for now, the general consensus is that MS and Nokia will have a hard time shaking the international smartphone market with the alliance between the leading hardware and software makers being firm and solid. “It is likely that Samsung Electronics will keep further away from the Windows phones, as Microsoft has decided to manufacture smartphones on its own,” said professor Jo Shin at the Future Convergence Technology Research Institute of Yonsei University. He added, “Rather low is the possibility that Microsoft could do as well as Apple on the software and hardware sides alike.” Besides, it could face even more difficulties if it fails to turn the tables at this time. 

Samsung Electronics Remaining Bearish in Stock Market 

On September 3, Nokia’s share price soared after the acquisition was announced, whereas Samsung Electronics lost 1%. The former gained no less than 47% during the early trading session and the price reached 4.1 Euros at 1:20pm, 38% up from the previous session. “The takeover signifies that Microsoft now has the two pillars of hardware and software as is the case with Apple,” said tech industry analyst Tim Bajarin. 

Meanwhile, the news dealt a blow to Samsung Electronics. Its stock price rose by close to 1% in the early session but began to fall after the news was made public. The closing price was 1,337,000 won (US$1,216.67), down 1% from the preceding session. Still, foreign investors bought its shares worth about 60 billion won (US$54.8 million). 

Although local stock analysts are mentioning that the buying indicates Samsung’s new freedom from the offensive by the two companies with low market shares, some of them predicted that foreign investors could change their stance from September 4 on. In fact, Samsung failed to turn bullish on that day, when the price dropped by 0.9% to 1,325,000 won (US$1,205.75) as of 9:22am. Foreign investors who bought its shares for nine consecutive trading sessions until September 3, are disposing of them too. The selling spree is being led by UBS, Citigroup, Merrill Lynch, CS Securities, and C.L.S.A. 

Although the price is going down, most Korean securities firms are saying that the Microsoft-Nokia partnership will have little impact on Samsung Electronics. “The takeover could result in waning support of Nokia by European consumers,” said Baek Jong-seok, research analyst at Hyundai Securities, continuing, “It seems that restructuring is on the horizon in the global smartphone industry, and those that survive will be able to enjoy higher profitability over time.”

Nokia’s Mobile Telephony Patents Putting a Strain on Korean Handset Manufacturers 

In the meantime the three Korean mobile phone manufacturers -- Samsung Electronics, LG Electronics and Pantech -- are busy guessing what will become of the acquisition. 

They are considering that their sales will be little affected by the takeover. Nokia has not focused on the sale of smartphones but feature phones, and thus it is not in direct competition with them. Also, Nokia accounted for only 3.2% of the global smartphone market in the previous quarter. Instead, they are anticipating that the new alliance will put a brake on Google. “The Google Android takes up 80% of the mobile OS market,” said a high-ranking executive at one of the firms, adding, “If the Windows phone manages to increase its presence in the global market, it can be used as a tool to keep the dominant force in check.”

What they are worried about is the mobile phone patents that will be handed over from Nokia to Microsoft. Nokia is in possession of approximately 10,000 mobile phone and telecoms patents. It has wielded such great influence in this field that it won the patent lawsuit against Apple last year to win a huge sum of patent royalties. 

Up to this moment, Nokia has not used its patents to attack other companies. On the contrary, it has allowed them to use the patents at a reasonable cost. However, Microsoft does use its patents for hostile purposes. “It is expected that Microsoft will demand patent fees on the Korean handset makers or put pressure upon them to include Windows phones in the product lineup,” said Electronics Engineering Professor Jeong Ok-hyeon at Sogang University.