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Behind the Microsoft Write-Off of Nokia
UnknowingFool writes: Previously Microsoft announced they had written off the Nokia purchase for $7.6B in the last quarter. In doing so, Microsoft would create only the third unprofitable quarter in the company's history. Released on July 31, new financial documents detail some of the reasoning and financials behind this decision. At the core of the problem was that the Phone Hardware business was only worth $116M, after adjusting for costs and market factors. One of those factors was poor sales of Nokia handhelds in 2015. Financially it made more sense to write it all off.
Where phone companies go to die.
After all, he is/was the master of epic disaster.
Like Sen. Everett Dirksen supposedly said, "A billion here, a billion there, and pretty soon you're talking real money."
The fact that Microsoft not only could write this off, but did write this off shows how little they care about anything but the bottom line. They took a good company with a generally excellent history and reputation, and, after beating it half to death, threw it away like a crumpled Dixie cup.
Just cruising through this digital world at 33 1/3 rpm...
Nokia got a new CEO in 2010 Steven Elop. Elop is a former Microsoft exec. As a former Microsofty, Elop bets all of Nokia on a Microsoft product despite said product being at least two orders of magnitude inferior than the competitor (Android). The bet never pays out... not even close to pays out. Microsoft buys former Microsoft exec's, Steven Elop, company (i.e. Nokia). Microsoft pays off Elop to leave in June 2015. Microsoft writes off the entire sum of the buyout of Nokia and then some (translation: the CEO and everyone at the top of Microsoft are saying "Nokia and all its companies and products are a complete waste of our money (i.e. 'writeoff')"). then microsoft lays off the vast majority of everyone in Nokia/WindowsPhone unit.
Rings true for the past decade and a half. Plus.
The same thing could be said about Google, and its apps. And the beat goes on to HP, IBM, Cisco, and the beat goes on. Though to the products-and-DIVISIONS-die-all-time drummer.
I won't mention Slashdot in the list.
For a couple of billion or so. Nokia would start making Android phones, and everything would be peachy.
http://www.theguardian.com/technology/blog/2011/feb/09/nokia-burning-platform-memo-elop
This killed nokia. I remember how fast nokia started sinking after this. And of course Elop (former MS employer) did this so MS could buy Nokia cheaper it was obvious back then it is even more obvious now. After each Elop new speech nokia would reach new lows. He should be prosecuted to be honest.
Microsofts prior, and arguably present business model of violently entering a market thats been dominated for 3-4 years with an identical product is something of a relic from Steve Ballmer. Its only ever been effective during the browser wars, when microsoft made IE an inextricable part of their OS and every subsequent update or patch forced the default browser to IE conveniently. In the hardware world things like the Zune and the phone were recognizable flops in every market segment but remained a going concern, with significant marketing and advertising to boot. Even the tablet, surface, experiences this as it takes multi million dollar losses every year and enjoys no real marketshare. Why?
Two things: Perpetual corporate licensing and XBox revenues. These are, arguably, microsofts only source of immediate revenue anymore. the OS is given away with every PC, and things like Azure and the upcoming Windows Watch will have to be priced lower than their competitors. What microsoft has is the real power to sustain a dead-on-arrival product, seemingly indefinitely, off these two revenue streams. Microsofts dated logic is that it doesnt have to make a better product for customers, it just has to outlast competitor offerings until price and marketing somehow win over customers. once the product fails, it simply rolls it under the carpet and chases the next white dragon, dated 3-4 years, and offers a similar product in a desparate attempt to remain relevant in a particular market.
Good people go to bed earlier.
Kramer : It's just a write off for them .
Jerry : How is it a write off ?
Kramer : They just write it off .
Jerry : Write it off what ?
Kramer : Jerry all these big companies they write off everything
Jerry : You don't even know what a write off is .
Kramer : Do you ?
Jerry : No . I don't .
Kramer : But they do -- and they're the ones writing it off!
So, everything was fine until Microsoft somehow (the article doesn't say) determined that goodwill was worth only $116 million instead of $5.4 billion. That's huge. This is the crucial piece that makes it all "make sense".
Microsoft bought their rival and destroyed them. It's all done now, Nokia isn't coming back. Microsoft can rest easy now, the threat to Windows Phone has been eliminated. It cost billions, but that's OK. Plenty more where that came from. What's the point of being a huge corporation if you can't do things like this from time to time? It's time to stroke a Persian cat and sip a snifter of brandy. The Company has been saved.
Shutting down free speech with violence isn't fighting fascism. It IS fascism!
The fact that Microsoft not only could write this off, but did write this off shows how little they care about anything but the bottom line.
Umm, writing this off does not in anyway improve their bottom line. Quite the opposite in fact. It's an admission that they bought something for a lot of money that is now worthless. What it shows is that they are not doing a very good job of maintaining the bottom line because the company is throwing money at bad investments. It's also a strong indicator that management at the time (read Balmer) was of questionable competence.
I can't be the only person in the US who purchased said phone, can I?
No but you aren't in a large crowd. I know I can count the number of Windows Phones I've seen in the wild on my fingers. Windows Phone was pretty much a solution nobody asked for several years later than anyone cared. Android and iOS already were large and dominant and developers weren't really looking to support a third platform. Technically it's probably fine but it offers nothing that people care about that the competition doesn't already have.
Furthermore Google is basically giving Android away so the handset makers have no incentive to care about Windows. Why would Samsung want to pay Microsoft for a product nobody wants anyway? Microsoft lacks the design culture and brand to compete with Apple on the high end (through vertical integration) and Google is undercutting them on price on the low end. Frankly I think Microsoft is screwed in the mobile phone market. I just don't see a path to profitability for them.
combine a restructuring with a big write down with lots of nebulas figures like marketing( wasn't, paying companies to use MS Software instead of Linux was from marketing funds ) and you get to hide lots of losses and revenue issues.
Actually, this is pretty common trick to improve the bottom line.
It does not improve the bottom line at all. That is an accounting fact. It has other effects but improving the bottom line isn't one of them.
It doesn't improve the bottom line in that quarter, of course, but the single huge writeoff concentrates all the losses in the one quarter, making all the other quarters look better. Management then passes off the one bad quarter as an anomaly.
You are talking about the Big Bath tactic. That is an earning management tactic to try to prop up the stock price by showing artificial profits in other financial periods. It is a fairly transparent and rather shady technique used to try to take advantage of the short memory of investors but make no mistake that it does nothing to improve the bottom line. Whether you take the hit all in one quarter or over time is irrelevant to the effect on profitability. Writing off an investment - any investment - reduces the value of the company.
Disclosure: Among other things I am a certified accountant.
Depending on how you look at it, Elop did a great job.
1) The comapny was already dead
2) He managed to get a lot of money for the company
I would say that that is a great job, unless that was not his (real) jobdescription.
Don't fight for your country, if your country does not fight for you.
'Under the patent piece of the deal, Microsoft acquired 8,500 design patents covering phone manufacturing from Nokia. Microsoft is also licensing another 30,000 "utility" patents from Nokia for ten years, with the option to renew in perpetuity.' ref
Some interesting comments from a lot of people, but having been part of the company for 15 years or so, I'd like to set the record straight on a few points.
First, on the nosedive of the business since Elop took the reins and losses incurred by Microsoft - many of us saw early that Elop didn't understand the business or Nokia. For a while, I personally thought it was a ruse, that there was a master plan - drive down the price for MS to take over, but once that happens, a plan would be in place to revamp the handset business. A few examples - doing away with proven OS hedging policies at Nokia (it was always multi-platform / multi-OS business) to be Windows-only shop, and refusing to build Android phone in the face or overwhelming evidence that if Nokia didn't do so it would spell the end of the business. However, it turned out Elop genuinely had no idea what he was doing, which continued wholesale after Microsoft takeover.
Second, on the "Symbian killed Nokia" nonsense - it was the other way around - Nokia killed Symbian. Nokia killed several attempts to build android-like layer on top of aging and awkward C++ APIs - this was years before iPhone or Android were even announced. Later, after buying Symbian, Nokia "open sourced" the OS only to take a year to contribute (non-building) codebase, and whole 18 months to produce documentation. Under the circumstances, other players - notably Samsung and Sony - gave up on the platform and moved on.
I owned a N800 and N900. Maemo was good and would have allowed Nokia to maintain the control and distinctiveness they had with Symbian. With support for Android apps, it was a win-win. They needed united support for Maemo internally, but instead got Elop. Elop decided to throw out Maemo and Sybian and throw everything behind Windows Phone. The rest is history.
Going Android would have been a bad move also, because they would have no edge over the other Android players. Having their own OS with support for Android apps was a better solution.
Nor disappointed. I was working for Nokia Mobile Phones as a senior engineer in 2014 when the MS deal closed. Before that, MS was reassuring us that we were not in danger of losing our jobs. Two weeks after the deal closed at the end of April, 2014, 13,000 of us were fired or laid off. So, screw you Microsoft!
Microsoft had a pretty large number of developers on board, in part to incentives they were handing out left and right...
The problem is even with that support, it did not matter because people were just not buying the phones.
Between the giants of Google and Apple, already well established, it's pretty hard to make other people know you exist much less buy your phone... even if you are Microsoft (or Blackberry).
"There is more worth loving than we have strength to love." - Brian Jay Stanley
Bingo. This "writeoff" is goodwill, which it just a way of accounting for why you're paying more for a company than appeared on its balance sheets. That includes a lot of things like "the experience of the employees", which is often what you're really buying when you purchase a company, and "expected future growth". Microsoft itself has only $61B in assets, but $380B in market cap. If you could buy it, the extra $320B would all be "goodwill".
You have to put it on your balance sheet to make the books balance, but there's no reason to keep it there forever. You used to just depreciate it; now it just gets "reevaluated" under various accounting rules. That's all MSFT has done.
It's not saying much about what Nokia has meant to Microsoft. It's just accountants trying to track where the value goes for the purposes of comparing one company to another. It doesn't indicate one way or the other on whether the Nokia deal was a good one, or whether Microsoft has managed it well.
Oh bull shit. Value of the company? Please we are talking about perception to investors.
No we are talking about the book value of the company and to some degree the intrinsic value. The secondary market value of the company is a separate concern.
The only thing a write-off decreases is the profits of the company at the time the write-off is booked.
Wrong. It decreases the assets of the company and increases expenses. It also affects the equity of the company because assets decreased and so equity must decrease also if you aren't adding liabilities. The write off also means that the expected future earnings from the asset are reduced which reduces the net present value of the enterprise. The notion that the only thing that is affected is the profits in that one financial period is demonstrably wrong and any accountant should be able to easily show you why.
It may also reduce the company's tax liability - by reducing its profit.
If you have an impaired asset you record the difference as a loss but it is no different than any other investment gone south. Put in simple terms what you are suggesting is selling a $2 bill for $1 to try to intentionally realize a $0.15 tax savings. The company is worse off by $0.85 so worrying about the $0.15 in reduced tax is idiotic. Any reduced tax liability should be small consolation for shareholders in the face of a $7 billion writedown.
Elop came in when Nokia had failed to produce anything to compete with the iPhone or even with a moderately decent Android handset. He managed to persuade Microsoft to buy Nokia for what now turns out to be a significant multiple of their real value. Of all the companies that benefitted from this, Microsoft was pretty low down the list.
I am TheRaven on Soylent News
Wow, this was upvoted insightful? You think $7.6B was a lot of money for a company that practically owned the lower-to-mid phone market when he took over? He had one amazing product coming out (the Maemo/Meego powered N9) that was seen as by far the best phone & OS when it came out by people who tried it (myself included), but chose to bury it (it was not sold in ANY major market) explaining that Maemo/Meego was not a good strategy, since they could only release 1 model/year. Yeah, like other "fruit" companies that release just one model per year (or less) can't make a $hitload of money and dominate smartphones for years.
If, on the other hand, you want the Google Play store, then you have to pay Google, agree to ship other Google apps in the default firmware install, and agree not to ship competing apps in a few categories in the default install.
The amount of money Google makes from this is almost negligible. Something north of 95% of Google's revenue comes from advertising so whatever they are charging to access Google Play it doesn't amount to much in the grand scheme of things. Microsoft on the other hand basically makes all their revenue from software sales so they pretty much have to charge something for it since they lack a supporting revenue stream. (unless you want to count desktop software sales but that would be kind of dumb of them)
A lot of that is marketing. It's far more a brand problem than a design culture.
Marketing isn't some magical pixie dust you can waive over a company to make people want their products. Marketing at its core is relationship development and that takes a lot of careful work and time. Microsoft has mostly done a terrible job developing relationships with customers. They've been the beneficiary of a monopoly so their survival never depended heavily on people having warm fuzzies when they think about Microsoft. Apple on the other hand has been arguably brilliant at it, almost from their beginning. Think about how many Apple stickers you've seen on the backs of cars. Probably quite a few - I see them regularly. People LOVE Apple even when they shouldn't. Apple has one of those brands like Harley-Davidson that people have almost a fetish for. Now how many Microsoft stickers have you seen? Probably none. By and large people don't love Microsoft or their products. Microsoft has the money to change this I suppose but it will take a lot of careful effort and time and frankly I doubt they have the corporate culture to pull it off.
Same old story, pilot damages plane until it can't fly, jumps to safety with his golden parachute. Passengers and flight attendants left to go down with the plane.
The company that started with nothing now does not know how to turn what used to be the world's pre-eminent phone manufacturer into something profitable. Meanwhile, other phone manufacturers are killing it. What's missing from this picture? Vision. Skill. Execution. It's all just about the numbers now. Did we make money on that? Nope. Kill it. MS has been completely overrun by business school grads. After Microsoft plummets to the earth, do you think B-schools will teach object lessons about the relative importance of B-school graduates? Hahahahahahahaha.
Microsoft is the Polaroid of the early naughties. Once upon a time, all the stars were in alignment, and they had the perfect formula. Now - well, not so much. Have you heard a visionary statement from Redmond lately? Besides "we promise not to suck so much"? "Maybe we'll start to play nice with others, but no guarantees!" I guess the icons are prettier now, or so I've heard. Can someone please provide a reason that anyone should care about this company, besides the fact that we'll need to spend another decade or two cleaning up the mess they made?
(NT)
Any chance that part of the motivation for taking control of Nokia was an attempt to undermine Qt (commercial licensing now under Digia: http://www.digia.com/)?
I agree - if I could get even credible substitutes for some of the apps I use regularly on Android, I'd switch over with no complaints.
There are elements of Windows Phone that are actually very nice and that I miss on Android - I actually like the tiled interface on a phone screen where I loathed it on a PC. The ability to have variable-size tiles showing information means that I can fit everything nicely onto a single non-scrolling screen with easy access to all of it.
fencepost
just a little off
To be clear, Microsoft never bought Nokia.
They bought the Nokia phone business, which was dying due to a switch to use Windows.
Depending on how you look at it, Elop did a great job.
1) The comapny was already dead
2) He managed to get a lot of money for the company
He did a horrible job. HTC made Windows phones too, but they were smart enough to also make Androids. Same thing with Samsung. Only Nokia was braindead enough to only make Windows Phones. Big mistake.
"First they came for the slanderers and i said nothing."
Couldn't every man and his dog see that this was always a total waste of money? If Microsoft wanted to make their own phones they always had the wherewithal to do it themselves. Besides which, Nokia was happily making their phones without them buying them. They should have just allowed that while secretly designing their own. Saved 8 billion or whatever. I don't know what these CEOs are thinking.
Nokia was steadily losing market share due to not having any Android phones, nor a good competitor for iPhone. Their latest Maemo devices had good reviews, but were limited to high-end phones only and also were never offered for subsidized contract prices in the US (afaik).
There were many better options for them to take, like having a good upgrade path for Symbian devs to create Maemo apps and not treating smartphones as a premium-only product that should not be sold in cheaper variants. They should also have been able to strike deals with US carriers for cheap smartphones that were free after 2 year contract - the Nokia at the time was still a well respected phone giant with great industry connections.
Instead, their shareholders allowed people on the board with little interest in the company's future and more focus on getting short term gains for their portfolios. They got Elop as CEO, and the infamous 'burning bridges' speech killed off Symbian & Meego/Maemo in a single day ... with no replacement coming for around a year! I'm amazed that a majority of shareholders were clueless enough to keep him around after that speech, it was clearly obvious that he'd just declared *all* of their then-current product lines as obsolete.
Right before Elop came onboard, Nokia had bought Navteq which gave them a chance to leapfrog Google Maps by offering a similarly comprehensive navigation app which also worked offline (at the time, GMaps didn't). Low cost smartphones running Maemo with Nokia Maps (now called Here) would have been an easy sell to people fond of Nokia hardware & reliability who wanted to dispose of their quickly-outdated standalone GPS devices.
Windows Phone actually made sense for Nokia: they needed a software stack that let them differentiate themselves (and no one else seemed to be using WP) and they had managed to set up their corporate structure in such a way that it was impossible for them to develop it themselves.
Which by itself is - in the current state of affair - a pretty dumb move. Part of the attraction of iOS and Android is the huge amount of apps that do exist for them. There are tons of apps for either platform, and tons of users. By trying "something different that no one else seems to use already", you're mainly, trying to gain success with zero apps, when you competitors have millions.
By trying "something as different as possible", Nokia cut themselves from huge ecosystems of apps. It's hard to convince million of app-maker to make even another version of their app for yet another smartphone OS wannabe (after they've already spent ressource in other not so successful ports like various versions of Symbian or Blackberry). Millions of apps aren't going to appear overnight, and until then you're not going to be attractive. Chicken and egg problem. (Funny how that, for once, Windows is at the receiving end of it, whereas Linux-kernel-based Android isn't).
That's also what killed other great alternative smartphone OS (like Palm webOS. Even after buying by HP they didn't manage to change the situation). It was a nice OS, one of the best UI at multitasking. But was a late comer at the party and had no ecosystem to leverage (or more precisely: attempted to leverage the wrong ecosystem. webOS did feature a PalmOS compatibility layer. But by then, this platform was nearly dead and Android was all the latest craze).
Luckily, Nokia's former developer didn't copy the same mistake while working as Jolla. They did deliver a very nice smart-phone OS (I like it nearly as mush as webOS), but they also provided an Android compatibility layer, so that at launch Sailfish OS doesn't lack apps.
"Sufficiently advanced satire is indistinguishable from reality." - [Tips: 1DrYakQDKCQ6y52z6QbnkxHXAocMZJE61o ]
It's main drawback is the lack of apps (which is hard to fix, as no one wants to develop for a platform with few users and no one wants to buy a phone with no software).
Luckily, the former Linux (Maemo/Meego) developer inside Nokia that got sacked and by that time had founded Jolla, have been aware of this problem.
And they fixed it easily, by providing an Android compatibility layer for Sailfish OS.
This way, you can have a new OS with lots new feature (nice UI based around Qt), but still can leverage the huge anroid ecosystem for any app that isn't ported to QML.
"Sufficiently advanced satire is indistinguishable from reality." - [Tips: 1DrYakQDKCQ6y52z6QbnkxHXAocMZJE61o ]
Now that I have used the N9 and Meego, I think that it is a big shame that Elop and MS killed it off. Makes me a bit angry.
Luckily he hasn't completely managed to kill them. He just let them go. They founded Jolla and continued the work producing Sailfish OS which is quite a decent smartphone OS.
(And also doesn't suffer from the same app problems. If something doesn't exist as a Qt app for sailfish, you can luckily run the android version on a compatibility layer that comes with your phone).
The big problem with it is that many apps don't work because they make references to web sites and services that no longer exist. Not even the Twitter and Facebook apps can talk to home. You can't even put it into developer mode because it needs to download packages from now-non-existant servers. Plus, it is really slow on Wifi networks.
{...}
At least I was able to get the terminal app onto the N9, so I have a shell prompt. The package files are out there and there is a Sailfish OS port, so I can play with things and try to get it working better.
I think too that the Sailfish port could a nice solution to salvage your old N9.
"Sufficiently advanced satire is indistinguishable from reality." - [Tips: 1DrYakQDKCQ6y52z6QbnkxHXAocMZJE61o ]
Use the NOKIA patent portfolio to threaten every phone maker into paying royalties...WHILE ALSO WRITING IT OFF!
Great strategy M$. From an old article:
Microsoft also bought the rights to license Nokia’s robust patent portfolio for 10 years. Microsoft is specifically buying 8,500 of Nokia's design patents, and will also make its patents available to Nokia for its HERE Maps unit. Nokia will also transfer its patent licensing agreements, including its big one with chipmaker Qualcomm, to Microsoft. Other patent agreements transferred to Microsoft includes those with IBM, Motorola Mobility (owned by Google), Motorola Solutions. Nokia also passes on patent agreements with Apple, LG, Nortel and Kodak to Microsoft.
Maemo was good and would have allowed Nokia to maintain the control and distinctiveness they had with Symbian. With support for Android apps, it was a win-win. {...} Having their own OS with support for Android apps was a better solution.
Luckily, the former Maemo/MeeGo guys didn't throw the ball, but formed Jolla and produced Sailfish OS for their phone, which is a very nice OS.
And has the desirable Android compatibility layer.
"Sufficiently advanced satire is indistinguishable from reality." - [Tips: 1DrYakQDKCQ6y52z6QbnkxHXAocMZJE61o ]
Please don't spread this myth. The company wasn't already dead. It was at that time - by far - the biggest smartphone vendor, which was growing faster in absolute numbers than anybody else, and the smartphone unit was highly profitable.
I only came to this article to post a comment disdaining Microsoft and hoping for their demise. I'm still mad about Internet Explorer in 1999.