The Battle for Supremacy in the Smartphone

Business

What does the NokiaMicrosoft Transaction Offer the Market?

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February 2014
 Contents

Section Slide Numbers

Executive Summary 3

Consolidation of Hardware and Software 6

What Can the NokiaMicrosoft Tag Team Offer? 11

The Frost & Sullivan Story 16

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 Executive Summary

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 What Everyone Wantsa Smartphone?

Smartphone Market: State Unit Shipments, Global, 20122017

2.00
1.80
1.60
Units (Billion)

1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
2012 2013 2014 2015 2016 2017
Units 0.75 1.05 1.20 1.37 1.57 1.80

Smartphones have become a ubiquitous commodity over the past few years, since the
introduction of the iPhone and Android-based phones.
Various estimates point out that the global smartphone user base has now crossed 1 billion
users worldwide.
Source: Frost & Sullivan

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 Shift Towards Affordability and Greater Mobility

Growth in the smartphone market has now shifted to emerging markets that are
more price sensitive and value conscious, constraining the margins of
established participants such as Apple and Samsung while leveling the playing
field for participants that compete on lower margins such as Huawei and other
Chinese contract manufacturers.

Even Apple has introduced the relatively cheaper iPhone 5C for emerging
markets having realized that penetration at the higher end of the market has
bottomed out.

Mini versions of flagship phones are also being releasedHTC One Mini,
Galaxy S3/S4 Miniin order to bring price points down for consumers, to
increase market share of individual brands and improve penetration in the
value-conscious segment.

Source: Frost & Sullivan

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 Consolidation of Hardware and Software

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 Operating System of Smartphones

Smartphone Market: Evolving Market Share of Smartphone OS, 20092012

60%

50%
Market Share

40%

30%

20%

10%

0%
2009 2010 2011 2012

Google Andriod RIM Blackberry Apple iOS Microsoft *Others

Android remains the dominant smartphone operating system (OS), iOS will remain the clear
number two operating system as the expected launch of a lower-cost iPhone will open up a
wider addressable market. Windows Phone will solidify its position as the number three OS
with incremental share gains in the future. *Others includes Bada (Samsung), webOS (Palm), Symbian (Nokia)
Source: Frost & Sullivan

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 The Future for the NOKIAMicrosoft Combine

In this context, it is interesting to analyze the acquisition of Nokia by Microsoft

for $7.2 billion.

Microsoft will pay $5 billion to substantially acquire Nokias Devices & Services
business and $2.2 billion to license Nokias patent portfolio non-exclusively for a
period of 10 years.

Microsoft will also separately license Nokias HERE mapping services for a
period of four years while also providing Nokia with $2 billion worth of
convertible bonds.

Source: Frost & Sullivan

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 Was the NokiaMicrosoft Transaction a Wise Move?

Predicting the impact of acquisitions is an inexact science. Possibly the greatest

investor of our times, Warren Buffet, is quoted with saying, "It's far better to buy
a wonderful company at a fair price than a fair company at a wonderful price."

So, was Nokia a wonderful purchase at a fair price or a fair purchase at a dear
price?

Evidence firmly points to the latter; Nokias share price has fallen from nearly
$40 in 2007 to about $6 currently and its market share in the smartphone
business has plummeted from nearly 40% in 2010 to a paltry 5% in 2013.

Considering that the strategic partnership between Nokia and Microsoft

beginning early 2011 couldnt stem the steady downfall of the once-dominant
phone manufacturer, the transaction begins to seem more like a last ditch
attempt by Microsoft to save the dominant hardware platform for Windows 8.

Source: Frost & Sullivan

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 What Can the NokiaMicrosoft Combine Offer Uniquely?

Microsofts primary value proposition is in aiding the creation of content while

smartphones and tablets are devices used to primarily consume content.
Microsoft has also been making acquisitions in the fields of touch interface,
social interaction, and cloud applications (Yammer, Perceptive Pixel, among
others), which are crucial to offering a wholesome mobile web experience.

Nokia, through its patent portfolio, holds close to one-third of the essential
patents and patent applications for LTE technology (aided by a 15-year
licensing agreement with Qualcomm).

Moreover, the vertical integration with Nokia is bound to increase margins that
Microsoft currently makes on every Windows 8 mobile device sold. The
company says that it would triple its margins, and that assuming annual sales of
50 million smartphones, the business would break even by fiscal year 2016.

Source: Frost & Sullivan

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 What Can the NokiaMicrosoft Tag Team
Offer?

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 Nokia and Microsoft Dither, but Still Possess Individual
Competitive Strengths

Much like Palm, BlackBerry, and other erstwhile stalwarts in the mobile devices
space, Microsoft was slow to spot the shift towards smartphone usage and the
important roles that user experience (related to choice of OS) would play in
smartphone adoption.

Considering the precarious position of Nokia in the mobile phone market,

Microsoft was presumably left with no other choice than to acquire the tottering
once-dominant phone manufacturer.

A large chunk of Nokias customer base is the feature phones owner segment.
A portion of this customer base, the high end feature phone users, could
conceivably be enticed into becoming smartphone users. This could be
implemented through selective buyback programs of their old feature phones
for Windows 8 smartphones.

Source: Frost & Sullivan

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 In Conclusion

Microsoft should also consider spinning off separate consumer and enterprise
business segments for its mobile computing business.

It is apparent that these two segments have widely disparate needs, and the
organizational structure of a company operating across these segments should
reflect that.

This would enable Microsoft to serve consumer and enterprise needs in the
best way possible. Concentrating on enterprise end users could reap benefits
due to the slow demise of the BlackBerry ecosystem.

Developing a Microsoft device network (Surface Pro, a Windows PC, and a

Windows smartphone) through the cloud could spur sticky usage of Microsoft
devices and services for mobile computing in enterprises.

Source: Frost & Sullivan

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 In Conclusion (continued)

Hardware has become commoditized in general, and differentiation based on

hardware alone in the present context will not deliver enough value for
consumers.

Concentrating on the unique value proposition of the Windows 8 OS and the

value-added services in the Windows ecosystem should be the message that
the Microsoft-Nokia combine should be sending out.

The message should be direct in its intent in offering a viable alternative to iOS
and Android (product analogy, alternative to iPhone series and Samsung Galaxy
series) while communicating its own unique advantages.

The smartphone product portfolio could be organized on the lines of end-user

application, that is, Personal and Business; possibly other versions like
Recreation, etc. could also be designed, only if they offer a unique value
proposition for that end-user segment.
Source: Frost & Sullivan

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 The Frost & Sullivan Story

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