Microsoft Buying Nokia - Why?

What do you do if you’re in market that is clearly dominated by two giant players and you can’t gain more than a single digit foothold? What do you do if your latest tablet has such terrible sales that you cut the price of it by $100?

You purchase most of Nokia NOK, another company that has gained little foothold in the cell phone space, for $7.17 billion in order to more deeply insert yourself into a market you have little chance of dominating.

That’s exactly what Microsoft MSFT announced late Monday. The move makes Microsoft the owner of Nokia’s devices and services business along with licenses to Nokia’s patents. It also places 32,000 extra employees on Microsoft’s payroll including some talented designers and Ex-Microsoft employee as well as ex-Nokia CEO, Stephen Elop—somebody who is rumored to be in the running for Steve Ballmer’s job.

Related: SLIDESHOW: Who Could Replace Microsoft CEO Steve Ballmer?

The deal has investors bidding up Nokia 40 percent in early trading Tuesday but it has some Microsoft faithfuls scratching their head. Doubling down on an investment that clearly isn’t working is considered a retail investor mistake so why is Microsoft dumping more resources into its cellphone business that currently has all of a 3.5 percent market share in the United States?

One theory could be that Microsoft, like the other mobile giants, see a ton of opportunity in other markets. 3.5 percent of the United States is disappointing to say the least but if you’re a cellphone manufacturer and you want to go where the growth is, you leave the confines of North America.

In the UK, for example, Microsoft’s Windows Phone market share doubled year over year in the most recent quarter from 4.2 percent to 9.2 percent. Combining the five major European territories which include Germany, the United Kingdom, Italy, France, and Spain, Windows Phone now has an 8.3 percent market share thanks, largely, to the sale of Nokia phones which hold a much better reputation in Europe.

Windows Phones are doing better in markets that don’t heavily subsidize handsets because of Microsoft’s ability to sell the phones more cheaply than Apple (NASDAQL AAPL)—a company that is expect to debut a “low cost” iPhone which will almost certainly remain too costly for the true budget customer.

Does that mean that all of the preliminary negativity from investors is unfair? Probably not given Microsoft’s recent string of less than blockbuster products which include the Surface Tablet, Windows 8, and its phones but there’s certainly value in the new influx of talent and the intellectual property even if, worst case scenario, it does little to give the company a larger foothold in the cellphone space.

Disclosure: At the time of this writing, Tim Parker was long Apple.