Dial V for value

THOMAS K. THOMAS | Updated on March 12, 2018

India still a laggard on the information highway.

Indian tech firms need to take lessons in value creation from the Vodafone-Verizon and the Microsoft-Nokia deals.

When Stephen Elop took over as Chief Executive Officer of Nokia in 2010, he compared the handset making company to a burning platform. On Tuesday, at a press conference in Espoo, Finland, it was announced that this burning platform will be acquired by software giant Microsoft for $7.17 billion in an all-cash deal.

Since then many analysts and former Nokia employees have called Elop as the Trojan Horse for Microsoft. Before joining Nokia, Elop was heading Microsoft’s Business Division and post the deal he will be back in Microsoft’s fold. Steve Ballmer, who is set to retire as the CEO of Microsoft, hinted that Elop could be in the running to succeed him.

One of the first things that Elop did soon after taking over as the CEO of the Finnish company was to make sure that Nokia smartphones would operate only on Microsoft software. This took many by surprise because until then Nokia phones were running successfully on its own operating system Symbian.

According to a report from Strand Consult, Nokia sold more than 110 million Symbian phones in the prior year, more than Apple’s iOs and Google’s Android together. After Nokia shifted to the Windows platform, its share of the global smartphone market fell from 34.2 per cent in 2010 to just 3 per cent in the first half of this year.

When Elop got the job, Nokia shares were at €8/share; now they are at €4. In 2007, Nokia acquired mapping and navigation company Navteq for $8.1 billion and six years later Nokia itself has been put on the block for just over $7 billion, which indicates that it was a distress sale.

Around the same time when the Microsoft-Nokia deal was being firmed up, Vittorio Colao and Lowell McAdam were discussing a $130-billion deal over breakfast at a restaurant a few miles away from the Golden Gate Bridge in San Francisco. The two Chief Executive Officers of Vodafone Plc and Verizon Wireless, respectively, were bringing the curtains down on a 14- year alliance whereby Verizon agreed to acquire the 45 per cent stake held by Vodafone in Verizon Wireless. In 1999, Vodafone had acquired equity stake in the company, then known as AirTouch Communications, for $66.5 billion.

Win-win for all

While the two deals look contrasting in terms of money exchanged, the acquisitions have the potential to be highly beneficial to all involved. In the case of Microsoft, the software maker gets access to Nokia’s highly valuable patents, strong distribution and a foothold with elbow into emerging markets. In India, for example, Microsoft gets access to 27 per cent of the total mobile phone owners, majority of who are currently using feature phones. Microsoft can introduce its Windows platform for this segment and hope to retain them as the market shifts towards the high-margin smartphone category over the next two years.

For Nokia, the sale, albeit at a low valuation, bails out the handset maker from a situation where it would have had no option but to close shop. Microsoft’s stronghold in the enterprise segment and key smartphone markets such as the US could revive Nokia’s fortunes, breaking the duopoly of Google’s Android phones and Apple’s iPhone.

On the other hand, Verizon will be free to integrate its wireless business into Verizon Enterprise Services without any concern about the Vodafone ownership. According to analysts at research firm Ovum, mobility and mobile access have quickly become a standard requirement for just about any enterprise service or application. With many synergistic technologies emerging (e.g. Long Term Evolution, Software Defined Networks, Cloud), this integration will become even more critical to Verizon over the coming years.

Vodafone now will have many options as the capital can fund its quest to expand in emerging markets. In India, for instance, Vodafone can use the money to buy more 3G spectrum or acquire another player.

Create value or perish

The deals also indicate that the technology industry is shifting into a critical period of restructuring where the focus is on creating value. Gone are the days when a brand could put a phone in the hands of a consumer and expect him to use it. Companies such as Blackberry learnt this the hard way after it got decimated in the market.

If a Microsoft sees merit in acquiring Nokia or if Verizon does not mind paying more than it wanted to for Vodafone’s stake, it is because these companies created value.

This is where Indian technology firms and service providers are lagging behind. Be it an Infosys or an Airtel, there has not been much focus on innovation.

To be fair, Indian tech companies succeeded initially because they cracked the low-cost business model several years ago.

However, the model has since shifted from being how cost-effective you are to being how relevant you are. Five years ago, having a cheap phone connection was enough but now customers want to know what they can do with it. Unfortunately, Indian telecom companies have not moved up the relevance chain.

Consumers in countries such as the US and Japan enjoy high-speed broadband with applications such as healthcare and banking services available at the swipe of the phone screen.

Indian users are still struggling to get basic connectivity. While this has partly to do with the lack of vision by the telecom companies, the muddled thinking on the part of policy makers has added to the stalemate. In the end, it is the Indian consumers who are missing out on the benefits of technology while the word zips past on the information highway.

Similarly, in the Information Technology space, companies which have a combination of products and services have a winning formula. The business model of hiring thousands of people at an off-shore centre to develop someone else’s product is over. If the Indian companies do not shift gears fast they will soon find themselves standing on the burning platform. And they may not even find anyone to bail them out.

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Published on September 04, 2013
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