So Microsoft finally pulled the trigger and is buying Nokia. 

Big. Risky. Bet.

The blogosphere is crowded tonight, but I have been watching these two flirt for so long that I had to post. There has already been a lot written about this in the two hours since it was announced and I imagine the wires will be crowded with commentary tomorrow, but a couple things stood out for me.

There are a few reasons why this could work:

• Windows Phone is showing some signs of life, and those are almost all in markets where Nokia has a solid distribution infrastructure and market position.
• As much as Microsoft is in turmoil there are a lot of smart people there and they have the bodies to do big hunks of software. They also learned a lot building the Xbox and maybe there are some lessons for smartphones from that. Finally, there is an interesting Intellectual Property (IP) angle to this. Microsoft is paying €3.8 billion for the hardware company and €1.7b for IP. Recall that Microsoft already has a good IP revenue stream from Android, so they can probably do something interesting here.
• Also note that they are also acquiring Nokia’s royalty agreement with Qualcomm, which means they are going to pay one of the lowest royalty rates out there.

So maybe this will work, but I have a few big concerns:

• Windows Phone (WP) has no clear low cost strategy. Lumias have done well in some emerging markets, but these are expensive phones. This has been a perennial problem for WP and there are no clear signs of Microsoft shrinking the codebase enough to fit on less expensive phones. And all this is happening just as low-cost smartphones are really taking off.
• This is a clear cut bet on vertical integration. I am not a big believer in that model. Apple can make it work, because they have almost always worked that way, but this is a major course change for Microsoft. They risk antagonizing the Taiwan PC complex on which they lived for so long. Who is going to build a Windows Phone now? Probably no one but Microsoft. The company’s deep ties to the PC complex were a staple of its success, but they have now turned their back on that.
• Microsoft is searching for a new CEO while undergoing a major re-organization. And now they are going to acquire and integrate Nokia. There are textbooks written on each of those, and Microsoft is going to try for the trifecta all at once. The key to vertical integration is the ‘integration’ piece and it remains a big question as to how well Microsoft can integrate 32,000 employees including 18,700 factory workers. To say nothing of the challenge of building hardware and software in conjunction at a rapid enough pace.
• Nokia’s financial condition looks pretty stretched. As part of the deal today, Microsoft is loaning the Nokia parent company €1.5 billion until the deal closes. I find it a bit extraordinary that a company is acquiring part of another one and needs to loan them money. That is something like buying a house and loaning the seller a third of the sale price until escrow closes. It does not imply much confidence in the seller.

This will not be easy.