Microsoft has agreed to acquire the mobile phone business of Nokia for €3.79 billion (US $5 billion). In addition it will pay €1.65 billion (US $2.18 billion) to license Nokia’s patents, bringing the total value of the deal to €5.44 billion (US $7.18 billion) in cash. The acquisition includes all of Nokia’s Devices and Services business, including the Mobile Phones and Smart Devices business units. Pending approval by Nokia’s shareholders and regulators, the deal is expected to close in the first quarter of 2014.

The takeover follows Nokia’s decision in early 2011 to adopt Microsoft’s Windows software for its smartphones, which Microsoft will continue to license to third parties. Microsoft will take over Nokia’s long-term patent licensing agreement with Qualcomm, as well as other licensing agreements. It will also acquire the Lumia brand associated with Windows smartphones, as well as the Asha brand for low-end smart devices. Nokia will retain ownership of the Nokia name and license it to Microsoft, although Microsoft said it aims to move to a unified branding as soon as possible.

Tarifica’s Take

This huge all-cash deal, which industry insiders have been anticipating for years, indicates that both companies feel the need to make major changes in order to be competitive in the smartphone era. Of course, Microsoft is in a far stronger financial position than Nokia—which has dramatically lost its former dominance in the handset business—but to a large extent the U.S. software giant has hitherto gained little traction in mobile telephony. Microsoft already had a close relationship with Nokia, currently the largest supporter of the Windows mobile operating system (it discontinued its own operating system in favor of Microsoft’s), and clearly seeks synergy by bringing the Finnish company’s handset business fully under its own roof. By unifying the two businesses, Microsoft says it will increase its ability to expand Windows’ share of the mobile market. Also, the merging of personnel and the sharing of intellectual property are intended to promote innovation and to facilitate branding and marketing efforts.

That much is clear, but we see something else going on here. Microsoft seems to believe that there is a significant untapped market in developing countries for lower-end, less expensive smartphones, and that Nokia, whose strength traditionally has been in simple feature phones, is well positioned to reach that market. However, Nokia’s share of the global smartphone market, currently split between Apple and Samsung, has dwindled to virtually nothing, and whether it can ever regain its prominence—even with Microsoft’s help—is very much open to question.