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Nokia sold to Microsoft: admission of defeat against Samsung and Apple in the Smartphone race, and Microsoft makes a precarious gambit

Finnish mobile phone manufacturer Nokia has agreed to sell its mobile handset arm to Microsoft in a deal worth EUR 5.4bn ($7bn). The deal represents the final hurrah of both the diminished Nokia, crestfallen by the advance of Apple and Samsung in the smartphone market, and current Windows CEO Steve Ballmer, due to step down in 2014.

Over 32,000 staff will transfer from Nokia to Microsoft, with the deal expected to be completed in 2014. For Microsoft, their monopolistic control over the PC market has been compromised by the advent of mobile and tablet technology. PC sales have been declining rapidly as mobile technology permitted their functionalities on smartphones and tablets. Microsoft’s response has been somewhat ineffective to date; Windows 8 software faces formidable competition from iOS and Android, who combined control about 92% of the market.  Their entry into the tablet market via the Surface saw a $900m “inventory adjustment”, larger than the sales of $853m for June 2013, reflecting financial failure.

80% of Windows operated phones came from Nokia. Nokia itself has struggled, producing critically acclaimed products but failing to undermine the Samsung Apple duopoly. Bringing Nokia into the Windows fold will permit the company to pursue development of mobile products, and keep total control of the products. In this, it tries to emulate the iPhone strategy, with hardware and software worked well together. Microsoft however may not be able to compete with the Apple brand, and its previous attempts to ape Apple haven’t worked out.

In terms of the mobile phone market, the sale represents Nokia conceding defeat and follows Blackberry’s announcement it’s searching for a new owner to renovate the company. Nokia’s early handsets dominated the mobile handset market, but couldn’t decisively compete with Apple and Samsung. The market edges closer towards concentration between Android operators and Apple. The operating systems have both attracted large amount of customers and developers in a self-perpetuating cycle. Windows 8 has been unable to attract many customers due its inhibited app store. If this cycle continues, Microsoft may struggle to sell its operating platforms to third party phone makers, such as HTC and Samsung, without an adequate customer base. Furthermore, it could alienate third party manufacturers if it starts directly competing with them.

The repercussions of the acquisition could decide Microsoft’s fate. It marks nostalgic recollections to the times when both Nokia and Microsoft were neigh impregnable with respect to competitors. Whilst Nokia has conceded defeat, it has lessons for Microsoft, which must do something in its mobile and tablet division if it wishes to stay relevant in computing.

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