Microsoft Explored Deal for Nokia

Microsoft Corp. recently held advanced talks with Nokia Corp. about buying its handset business, people familiar with the matter said, as laggards in the fast-moving mobile market struggle to gain ground.

The discussions faltered over price and worries about Nokia’s slumping market position, among other issues, these people said. One of the people said talks took place as recently as this month but aren’t likely to be revived.

“We have a deep partnership with Microsoft, and it is not uncommon for Nokia and Microsoft to meet on a regular basis,” a Nokia spokeswoman said. A spokeswoman for Microsoft declined to comment.

It isn’t clear how much money Nokia wanted for its handset unit. Nokia’s U.S. stock-market value is more than $14 billion, and the company generated nearly half of its €30.2 billion, or about $40.15 billion, in revenue last year from its mobile-phone segment.

Hardware and software suppliers, retailers, television networks and many other companies increasingly see smartphones, tablets and other mobile devices as fundamental to their futures. Consumers are spending more of their time glued to their phones—watching videos, shopping, keeping tabs on their friends and staying on top of work—than on the personal computers once at the center of the tech sector.

The mobile revolution has minted winners, like Apple Inc. and Samsung Electronics Co., while other players have failed to adapt quickly enough to market changes. The latter category includes Microsoft, the PC software pioneer, and Nokia, a leader in early cellphones that has fallen behind since Apple’s 2007 introduction of the iPhone made smartphones a staple for many consumers.

Nokia’s dilemma was summed up dramatically more than two years ago by Stephen Elop, the former senior Microsoft executive who became Nokia’s chief executive.

In a widely quoted internal memo, Mr. Elop compared Nokia to a man working on a burning oil platform in the middle of the North Sea. The man’s unpalatable options were to risk death on the “burning platform,” or take a risky plunge into the freezing water for a shot at saving himself.

Mr. Elop made his choice. Nokia jumped at an alliance with Microsoft, which at the time was looking for an ally for its new smartphone software. Nokia picked Microsoft’s Windows Phone smartphone system over Google Inc.’s Android software in the battle against Apple. Microsoft and Nokia agreed to a broad partnership that made the companies deeply dependent on each other for their mobile future.

Nokia agreed to use only Windows Phone software to power its smartphones. Microsoft agreed to spend billions of dollars to give Nokia help with marketing and engineering.

But the partnership so far has failed to significantly lift the companies’ mobile fortunes. While Windows Phone has leapfrogged Research In Motion Ltd.’s BlackBerry as the third-biggest smartphone system in the world, sales continue to struggle amid competition from Samsung and other smartphones powered by Android.

Microsoft Chief Executive Steve Ballmer has continued to defend the promise of its phone software to become a major contender. But it remains a disappointment, as Samsung, HTC Corp. and other phone makers stress Android and treat their work with Windows Phone as a sideline.

Research firm IDC said Windows Phone represented slightly more than 3% of smartphones shipped world-wide in the first quarter of this year, while about 75% of new smartphones were powered by Android software.

Nokia is by far the biggest seller of Windows Phone devices, representing 79% of all Windows Phone devices in the first quarter, according to IDC data, and Nokia is the sole major smartphone maker that makes Windows Phones exclusively. That means Microsoft needs Nokia to stay financially viable and committed to Microsoft.

Mr. Ballmer increasingly has shown he is willing to deviate from the company’s traditional business of making software that powers computing devices, but leaving the design and marketing of PCs, tablets and other gadgets to allies.

Microsoft in the past year has launched its first homegrown computing device, the Surface tablet, which launched last fall and upset the company’s relationships with partners such as chip maker Intel Corp. The Wall Street Journal previously reported that Microsoft has tested with suppliers designs for its own smartphone handset, another first for Microsoft. The status of a company smartphone is unclear.

Even with Microsoft’s new emphasis on homegrown hardware, it isn’t clear why Microsoft would be interested in owning Nokia’s devices business, which is mainly comprised of mobile phones. The companies’ existing partnership essentially made the Finnish company entirely dependent on Microsoft, without requiring Mr. Ballmer to buy Nokia outright.

Mr. Elop, meanwhile, remains under pressure to revive Nokia. During his tenure, the company’s stock-market value had cratered to about €30 billion when he was hired in 2010 to about €10 billion this spring. At its height during the tech bubble in 2000, Nokia was worth €303 billion. The discussions with Microsoft, even if they failed to result in a deal, suggest that major chunks of the company seem to effectively be in play.

Nokia’s shares in the U.S. closed Wednesday at $3.85 each.

Nokia last year considered a potential spinoff of Navteq, the company’s mapping business used in auto GPS systems and digital-location services from Microsoft and others. Mr. Elop shot down the idea because he believed mapping was an important cog in Nokia’s product offerings, according to the people familiar with the internal deliberations.

With help from a sovereign-wealth fund in the country, Nokia also has been exploring a buyout of its partner, Siemens AG, in their Nokia Siemens Networks telecom-equipment joint venture, people familiar with the matter have said.