Microsoft to aquire {NVIDIA|Nokia|Yahoo|Whoever}

Over the last few weeks there have been rumors that Microsoft would acquire Nokia, which were completely denied, followed by rumors that Microsoft would acquire NVIDIA.  The latter were caused by a clause in a contract Microsoft has with NVIDIA that would allow Microsoft to acquire them if, basically, someone else tried to.  The existence of a “right of first refusal” or similar language in major contracts is not unusual.  I guess the press blowing it all out of proportion isn’t unusual either.  When you don’t actually want to acquire someone, but you want to take a bet on them that having them go out of business or be taken over by a competitor could do you material harm, you look for ways to protect yourself.  For example, when companies purchase software from a small to mid-size vendor they generally require that vendor to put a copy of the software in escrow.  Then if the vendor goes out of business the purchaser can take the software out of escrow to maintain it themselves.  Or, as in the case with NVIDIA, you can take measures to insure that a competitor can’t acquire them and deny you access to the technology.

I don’t know what the deal Microsoft has with NVIDIA really means.  Perhaps it is, as most press speculation focuses on, that NVIDIA is so important to the tablet market that Microsoft wanted to make sure Apple didn’t acquire them.  But frankly I find that one a little bit of a stretch.  It certainly is possible, but I would think it is in Microsoft’s best interest to provide encouragement for more competitors in this space rather than be defensive about one.  Not only that, it is the OEMs/ODMs who would really worry about losing access to NVIDIA’s chips more than Microsoft.  At least under this scenario.  So I think there is more here.  What would really justify this clause is if Microsoft and NVIDIA were engaged in a project such as the design of a chip for a next generation XBox.  That would be the kind of situation that demanded Microsoft protect itself from a competitor purchasing NVIDIA.

Today I saw one blog post expressing the idea that if Microsoft isn’t going to acquire Nokia then perhaps Samsung was preparing a bid.  Now that is probably 100% speculation on the bloggers part, though I could see Samsung considering it.  However, how much do you want to bet that there is some kind of “right of first refusal” in the Microsoft/Nokia contract as well?  In fact, I wonder if that was what started the Microsoft acquiring Nokia rumors a couple of weeks back!

The problem with both these wanna-be acquisitions is that neither easily fits into Microsoft.  There are two things to keep in mind.  The first is that Microsoft is neither a conglomerate of little or loosely related business nor a single business, it is a collection of mutually reinforcing businesses.  The second is that it has a really spotty record as a hardware company (the mouse/keyboard business aside) and doesn’t see itself wanting to become more of one.  The Zune was a failure.  The XBox 360 is hugely successful, but recall the “Red Circle of Death” teething problems it had and the $Billions that cost Microsoft.  The only reason Microsoft sells its own gaming console is that the business model doesn’t work for OEMs.

Microsoft could have responded to the iPhone by building its own phone.  After agonizing over this, Microsoft chose to stick with the OEM/ODM model that has been its strength since the company first entered the OS business (and is generally considered Bill Gates most significant business innovation).  Purchasing Nokia would be a reversal of direction, screwing half a dozen or more other partners in the process.  I have no doubt that Steve Ballmer would do this if he came to the conclusion that it was the only way to succeed in the smartphone market.  But as Android has already demonstrated that the OEM/ODM model still works, Microsoft needs to tweak its model (and product and marketing) rather than reverse itself.  On the other hand, if Microsoft found itself unable to get sufficient OEM/ODM commitment then it would have to get directly into the phone business.  So an acquisition of Nokia, which Microsoft has bet on to give it traction, by another phone maker would force Microsoft to reconsider its position.

NVIDIA doesn’t fit Microsoft’s mutually-reinforcing businesses model, and it is a hardware undertaking, and it is a chip business (which Microsoft has absolutely no experience with).  I’m sure Microsoft has no interest in actually owning NVIDIA (not that someone hasn’t suggested it; name a company and I’m sure someone in Microsoft has said “why don’t we just buy them” at some point) other than protecting its access to technology.  In fact, if it ever was forced to buy them to prevent a competitor from doing so I’m sure they would look to spin it back out, or sell it to a friendly partner, pretty quickly.

I can think of a dozen companies Microsoft should acquire, but they are almost never the ones that hit the rumor mill.  So while NVIDIA and Nokia are all the rage, I expect the next actual Microsoft acquisition will be more of a surprise.  Just like Skype.

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