A $7.5b les­son that Mi­crosoft won't for­get

The Pak Banker - - COMPANIES/BOSS -

Let's call it the $7.5 bil­lion (Dh27.5 bil­lion) les­son. That's the amount Mi­crosoft wrote off on Nokia's phone unit, which it bought a lit­tle over a year ago for what it said was $9.5 bil­lion. Con­sid­er­ing that the deal in­cluded $1.5 bil­lion in cash, the write-off means Mi­crosoft now val­ues a busi­ness that once con­trolled 41 per cent of the global hand­set mar­ket at just a small frac­tion of the pur­chase price.

Thanks in large part to the huge ac­count­ing charge, Mi­crosoft re­ported its largest quar­terly loss ever ($3.2 bil­lion). It was only the third loss in its history as a public com­pany. "If you were talk­ing about any other in­dus­try, this would be con­sid­ered a catas­tro­phe that's the equiv­a­lent to a nat­u­ral dis­as­ter," said Ho­race Dediu, who spent eight years at Nokia dur­ing its hey­day.

This be­ing the tech­nol­ogy busi­ness, Mi­crosoft's still rel­a­tively new chief ex­ec­u­tive, Satya Nadella, gets credit for swiftly con­fronting re­al­ity and tak­ing the hit to earn­ings. This may have been eas­ier given that it was his pre­de­ces­sor, Steve Ballmer, who pushed through the deal.

Nadella op­posed the pro­posed deal in an ini­tial poll of top Mi­crosoft of­fi­cials. But Ballmer was de­ter­mined to push the deal through as a cap­stone to his long ten­ure as chief ex­ec­u­tive. Even af­ter the deal was re­vised, and Nadella is­sued a public state­ment sup­port­ing it, two di­rec­tors voted against it. Both have since left the board. Mi­crosoft's spokesman, Frank X. Shaw, said it was nor­mal for there to be in­ter­nal de­bate over ma­jor ac­qui­si­tions. Still, it's rare for there to be open board dis­sent once fi­nal terms of a deal have been struck.

Mi­crosoft is also in good com­pany. Google aban­doned its foray into smart­phones when it sold Mo­torola Mo­bil­ity to Len­ovo last year. But it has writ­ten off just $378 mil­lion re­lated to the $12.5 bil­lion Mo­torola ac­qui­si­tion. Ama­zon wrote off an even more mod­est $170 mil­lion in Oc­to­ber, ac­knowl­edg­ing that its Fire phone was a flop. "We try to learn from ev­ery­thing we do as we launch new op­por­tu­ni­ties," said Ama­zon's chief fi­nan­cial of­fi­cer at the time, Thomas J. Szku­tak.

But far more was at stake for Mi­crosoft than for Google or Ama­zon, since the main point of the both hand­set op­er­at­ing sys­tems and hard­ware are pretty much global duopolies, with Google and Ap­ple dom­i­nat­ing soft­ware and Sam­sung and Ap­ple dom­i­nat­ing hard­ware. Mi­crosoft has jet­ti­soned the strat­egy. Mi­crosoft's "grand scheme was to have a sin­gle plat­form that ran on PCs, lap­tops, tablets and phones, and to be able to sell ap­pli­ca­tions that run Win­dows," said Ni­cholas Econo­mides, an eco­nom­ics pro­fes­sor at the Stern School of Busi­ness at New York Univer­sity. "That failed."

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