Why is Microsoft buying Nokia phones?

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In this Aug. 15, 2013 photo, Nokia's Lumia 925 phone is shown at the flagship store of Finnish mobile phone manufacturer Nokia in Helsinki, Finland. Microsoft Corp. is buying Nokia Corp.'s devices and services business, and getting access to the company's patents, for a total of 5.44 billion euros ($7.2 billion) in an effort to expand its share of the smartphone market, the companies announced late Monday, Sept. 2, 2013. (AP Photo/Lehtikuva, Mikko Stig)

Shares of Microsoft slipped around $1.50 a share, to below $32, in early trading after the Windows software maker said it will pay more than $5 billion to buy Nokia's handset mobile phone business, patents and mapping service, using past profits from Microsoft sales outside the U.S. The deal echoes Google's previous purchase of Motorola's mobile-phone division.

But the Microsoft-Nokia deal "is more about protecting Microsoft's Windows Phone distribution, rather than serving any strategic purpose," Yun Kim, New York-based analyst for Janney Capital Markets, warned clients in a report this morning. Since Windows phones account for less than 1 of every 25 smartphones shipped last quarter, far behind Android and Apple, "Microsoft's acqquisition of Nokia's mobile business does not provide any meaningful strategic value" to Microsoft, he added. The low-profit phones will likely drive down Microsoft profit margins by 6 percentage points, and maybe more, he adds. "Until there are signs that Microsoft can innovate and successfully execute in the post-PC era, we expect the stock to languish." 

The deal looks better for Nokia, whose stock rose around $1.50 to above $5 in early trading, says T. Michael Walkley in a report to clients of Cannacord Genuity. The company was under pressure from investors to concentratae on higher-profit businesses like the Nokia-Siemens Network. Sales of Nokia's Lumia Windows phones sales are up, not just in developing markets like Russia, but in the U.S. and the U.K., Walkley adds, adding that Nokia 1020 is one of the most popular recent sellers at AT&T.

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