Studying Microsoft-Nokia merger

Shim Young-seop

Since Microsoft-Nokia merger was announced in September 2013, the global mobile phone market has been shaking. It is not a mere corporate merger but is likely to change the structure of the market completely. Not just the mobile phone market but also the patents directly related to the product are expected to change. Therefore, we need to study the consequences and the economic impact before and after the merger.

The United States and the European Union, which don’t have much to lose from the merger, welcome Microsoft’s acquisition of Nokia’s mobile phone sector. The United States and EU authorities have approved the M&A of the two companies without condition. They seem to hope the deal will revive Nokia, whose influence has dwindled in the mobile phone market, and provide horizontal business momentum to Microsoft. The decision was based more on industrial policy than competition policy.

The problem is that Nokia is now to withdraw from the mobile phone market after the smart mobile device sector moves to Microsoft. After handing over the troublesome mobile phone business, Nokia will still hold mobile communication-related patents and is likely to turn into a nonpracticing entity (NPE), also known as a “patent troll.”

The situation will be completely different from the days when Nokia was in the business and used patents together with its competitors. Nokia can now increase the patent fees as much as they want. There are rumors in the market that the fee will go up by a two-digit rate. Market players are concerned about Nokia’s potential abuse of patent portfolio.

Microsoft, the acquirer, hasn’t just expanded the business territory. Now it has mobile devices on one hand and software and application patents on the other to have an added negotiating edge. Microsoft as a mobile phone maker is completely different from Microsoft, which develops PC and mobile phone software. It will want to enjoy even more influence in the mobile phone market that the monopolistic power it has in the PC market. When MS and Nokia merge, Europe would not have a mobile phone maker, and outside North America, MS will only have competitors in Asia, including Korea and China. When the M&A is completed, Microsoft will be providing patents not to business partners but to competitors, and in order to check on them, it may ask for a higher patent fee or apply discriminatory conditions. The controversy over excessive patent fees on the Android operating system continues, and the strategic merger with Nokia will only aggravate the concern.

The merger in the mobile phone market can always turn into a patent war. Then, the production cost of mobile phones will go up, which will be reflected in the retail price. Consumers will be affected more by patent battles rather than the new market order after the merger. When that concern becomes reality, the consumers will have to pay a higher price for the devices that use the patents. Consequently, consumer welfare would suffer, and competition authorities wouldn’t be able to neglect the downturn.

It’s unusual for an M&A deal between companies to affect not just the market structure, but the system itself. Therefore, it is only fair to assess the context of the changes in the market situation caused by the merger. If the impact of the merger spreads and limits competition and consumer welfare, then the authorities must review the deal thoroughly. The competition authorities in Korea and China need to closely assess the merger between Microsoft and Nokia.

*The author is a senior researcher at the Korea Institute for Industrial Economics and Trade.

By Shim Young-seop