Microsoft Buys Nokia Smartphone Unit, Elop Returns as Executive

Turns out the Steve Ballmer retirement was just one of the big changes at Microsoft.

Now, the software giant is making a bigger bet on producing its own hardware by buying the smartphone business of Finnish handset manufacturer Nokia for about $7.2 billion. Microsoft is paying for the deal with cash it has stowed overseas.

The two companies have been working closely on smartphones for a few years, ever since former Microsoft executive Stephen Elop was hired as Nokia CEO and promptly signed up Microsoft to supply Nokia’s core smartphone software.

Now, he’s headed back: As part of the deal, Elop resigns the top Nokia spot and will head over to Microsoft with the “devices and services” business, along with a few other key executives. In an e-mail to employees, Ballmer said that Elop would “lead an expanded Devices team, which includes all of our current Devices and Studios work and most of the teams coming over from Nokia, reporting to me.”

With Ballmer’s sudden retirement announcement—he’ll actually step away from the job in about a year—Elop is immediately being seen as a top replacement candidate. In fact, he’d been seen as a possible successor even before this latest blockbuster deal.

Ballmer wouldn’t take the bait in an interview with The New York Times, saying only that Microsoft “is running an open succession process.”

As a single transaction, buying Nokia isn’t the world’s biggest surprise—Microsoft had effectively deputized the company as its hardware alter-ego in the smartphone wars, as it tries desperately to catch up to Apple and Samsung. Those two companies control most of the profits in the market, with Apple making big margins on the second-place market share and Samsung pushing a wide array of devices built around the Google-owned Android operating system.

But in the bigger picture, this change is another historic shift in a short period of time for Microsoft. Ballmer infamously mocked the iPhone as an expensive boondoggle, but Microsoft has seen Apple’s flagship device become more valuable than its entire company. A huge company reorganization, Ballmer’s impending retirement, and the purchase of Nokia all signal Microsoft’s seriousness about finally deciding to go all-out with an integrated, hardware-and-software approach.

Microsoft said it would continue supplying its own digital applications for iPhone and Android phones, “but we cannot risk having Google or Apple foreclose app innovation, integration, distribution, or economics.”

Microsoft also gets licensing of patents and digital services, including Nokia’s HERE mapping service, which it said was needed to pose “an effective alternative to Google” and its market-leading Maps product.

Microsoft said the deal would add some 32,000 employees to its roster around the world. Smartphone research and development will continue to be done in Finland, the company said, and Nokia’s sales team will remain intact.

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