In an earlier positing (here), I described how Microsoft's now outgoing CEO Steve Ballmer talked about Microsoft being a consumer company, despite having only around 15% of sales to consumers. Windows is mostly bought by OEMs (original equipment manufacturers) and Office by corporations. Since Microsoft is invoicing corporations and not consumers, it is a business-to-business company whatever the CEO is saying. Very few consumers make an active choice to buy Windows or Office. Consumers actively buy Playstation and Skype services but those products are a small portion of Microsoft's revenues.
Purchase of Nokia's mobile phone business. On September 2, 2013, Microsoft made a bid for Nokia's mobile phone operations. This changes everything since, suddenly, Microsoft will have around 30% of revenue coming from consumers. Steve Ballmer is stepping down from the CEO position, but his successor will have to take both business and consumer sales seriously. Prior to this acquisition, realistically, the incoming CEO could have decided to focus almost exclusively on the business customer. This is no longer possible. Steve Ballmer has tied the hands of the incoming CEO. The new CEO will have to deal with both consumer and business customers. This is not going to be easy since Microsoft has failed to create loyal consumers during the last decade (e.g. the stylus-tablet laptop failed, previous Windows phones failed, Zune MP3 player failed, Surface tablet failed). What are the chances that the company suddenly is going to be the consumer's favorite?
Potential upside. The upside is huge if Microsoft can develop a way to capitalise on the consumer. However, that means competing with Google, Apple and Samsung. Not easy. The new CEO will have to spend a lot of time on the consumer segment to increase the chances of success. At the same time he will have to spend a lot of time on the business segment, because that is Microsoft's cash cow. This is too much responsibility for one individual. To have any chance of success, Microsoft will have to reorganise into a business segment and a consumer segment division. Microsoft is large so these two divisions will individually be larger than most companies in the US. It is not easy, but definitely possible, to find two good divisional managers. However, the relationship between the CEO and the divisional managers will be a key stumbling block.
Prediction. Since Nokia's future is totally tied to Microsoft's operating system, I think there will be no other bidders. It is likely that Nokia's owners will consider the offered price too low, but since there will be no other bidder, they do not have a strong bargaining position. (However, there is a possibility that the Nokia brand is still valuable enough for a private equity consortium to acquire the company and quickly change to Google's Android. Or a true merger with HTC would be another option.) Assuming that Microsoft's bid will go through, my guess is that its share price will do well once they have found a new CEO and all the equity analysts having run their optimistic new spreadsheets treating the best-case scenario as the most likely.
Longer term, I predict that the foray into the consumer segment will fail. Microsoft will continue to make money in the business segment for now. After 2-3 years of disappointing consumer sales (and big discounts), Microsoft will decide to spin-off or sell its consumer business. During this period, top management will have wasted time and failed to capitalise on the opportunities opening up in the business segment. This involves actually updating Excel and Powerpoint with new features as well as getting into new segments like cloud computing.
Once the new CEO is in place and we know Microsoft's new business-unit strategies, I will write another update. (Current share price: Microsoft USD 31.5, down 6% after announcement; Nokia EUR 4.0, up 35% after announcement)
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