A $7.5b lesson that Microsoft won't forget

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."