Microsoft’s Nokia acquisition says company not giving up in hardware battle

Microsoft is buying Nokia’s lineup of smartphones and a portfolio of patents and services in an attempt to mount a more formidable challenge to Apple and Google.

GeekWire’s Todd Bishop says this is a huge deal for the Redmond company.

“This is a blockbuster deal. It’s not the largest deal in Microsoft’s history financially, that was Skype, which Microsoft bought for $8.5 billion, but in terms of its potential to transform Microsoft, this is a real game-changer,” says Bishop.

“Microsoft is attempting to transform itself from a software company into a devices and services company, and the acquisition of its largest smartphone partner is a huge step in that direction.”

The $7.2 billion deal announced late Monday marks a major step in Microsoft’s push to transform itself from a software maker focused on making operating systems and applications for desktop and laptop computers into a more versatile and nimble company that delivers services on any kind of Internet-connected gadget.

Microsoft is being forced to evolve because people are increasingly pursuing their digital lives on smartphones and tablet computers, causing the demand for PCs to shrivel.

The shift is weakening Microsoft, which has dominated the PC software market for the past 30 years, and empowering Apple, the maker of the trend-setting iPhone and iPad, and Google, which gives away the world’s most popular mobile operating system, Android.

Nokia, based in Espoo, Finland, and Microsoft have been trying to make inroads in the smartphone market as part of a partnership forged in 2011. Under the alliance, Nokia’s Lumia smartphones have run on Microsoft’s Windows software, but those devices haven’t emerged as a popular alternative to the iPhone or an array of Android-powered devices spearheaded by Samsung Electronics’ smartphones and tablets.

Microsoft is betting it will have a better chance of narrowing the gap if it seizes complete control over how the mobile devices work with its Windows software.

“It’s a bold step into the future, a win-win for employees, shareholders and consumers of both companies,” Microsoft CEO Steve Ballmer said in a statement.

The acquisition is being made at the same time that Microsoft is looking for a new leader. Just 10 days ago, Ballmer, 57, announced he will relinquish the CEO reins within the next year in a move that many analysts regarded as Microsoft’s tacit admission that the company needed an infusion of fresh blood to revitalize itself.

The deal fuels speculation that Nokia’s CEO, former Microsoft executive Stephon Elop, will emerge as a top candidate to succeed Ballmer.

“The heir apparent is Nokia CEO Stephon Elop, who is going to become an executive vice president of the Nokia unit as part of this deal at Microsoft and would seem to be at least leading the pack of potential successors to Steve Ballmer,” says Bishop.

Microsoft hopes to complete the deal early next year. If that timetable pans out, about 32,000 Nokia employees will transfer to Microsoft, which currently has about 99,000 workers.

The money to buy Nokia’s smartphones and patents will be drawn from the nearly $70 billion that Microsoft held in overseas accounts as of June 30.

Not everyone sees this as a good move for Microsoft. Some analysts are questioning whether buying up the mobile business of Nokia, the fading star of the cellphone world, would aid the company.

“Until there are signs that (Microsoft) can innovate and successfully execute in the post-PC era, we expect the stock to languish at current levels,” said Janney analysts Yun Kim and Alice Hur. “We do not believe the planned acquisition of (Nokia’s) mobile business changes (Microsoft’s) strategic positioning in the smartphone market.”

Microsoft’s shares fell $2.05, or 6.1 percent, to $31.35 in midday trading in the U.S. on Tuesday.

Microsoft expansion into mobile devices hasn’t fared well so far. Last year, the company began selling a line of tablets called Surface in hopes of undercutting Apple’s iPad. The version of Surface running on a revamped version of Microsoft’s Windows operating system fared so poorly that the company absorbed a $900 million charge in its last quarter to account for the flop.

Microsoft is now betting it will have a better chance of narrowing the gap with its rivals if it seizes complete control over how mobile devices work with its Windows software.

“Microsoft still faces massive challenges from Apple and Google, iPhone and Android, but this is Microsoft’s stake in the ground saying that it’s going to take control of its own destiny when it comes to smartphones,” says Bishop.

The Associated Press and KIRO Radio Editor Val Stouffer contributed to this report.