Microsoft is buying Nokia’s Devices and Services business for roughly $7 billion. The deal signals the end of an era in the mobile space, with Nokia effectively now pulling out of the mobile phone business. But beyond this era-ending component, Microsoft’s acquisition signals a bold move by the software giant to accelerate its plans in the mobile space by owning, for the first time, both the software and hardware required to grow the Windows Phone operating system, which currently accounts for less than 3% of the smartphone installed base in the US.
Of course, this is not the first time that Microsoft has taken on the hardware side of the business: the company tightly controls the development of its Xbox hardware, and more recently built the Surface tablet. But these were the exception, rather than the rule for a company that has historically developed software, not hardware.
The move is clearly not without precedence: Google bought Motorola last year, providing the company with a substantial hardware base, although the results of this acquisition have yet to bear real fruit. Apple highlights the real strength of combining software and hardware and the benefits that can come from a tightly-integrated solution. My colleague, Stephen Baker, touches on the Apple angle more in his blog.
However, the issues facing Nokia and Microsoft are somewhat different from these previous examples. The two companies already have a close working relationship, thanks to Nokia’s CEO Stephen Elop’s (ex-Microsoft) decision to jump into Windows Mobile with both feet. Since that decision in 2010, the two companies have worked closely to build the ecosystem. But while the hardware and operating system jive together well, the rather large elephant in the room remains the apps ecosystem, and the lack of key applications for Windows Phone.
Nothing in Monday’s announcement will help address that issue and without a rush of major developers to add the key apps, the operating system will continue to struggle. As a case (or two) in point, neither Instagram nor Starbucks provide “official” apps for Windows Phone (there are third party versions). Instagram, of course, is owned by Facebook, in which Microsoft was an early investor. Can the new Microsoft computing device business help address some of the application issues? Perhaps, but it is still a long-shot. If two separate companies could not persuade some of these developers to act, one unified company is unlikely to have better luck. And without these key, quality apps, the operating system will continue to struggle.
One key advantage of the combined entity will be to leverage the best of the services, rather than the current situation where multiple solutions are available to the client. For example, both Microsoft and Nokia offer music services via the Windows Phone and a more tightly integrated solution will provide a very compelling solution that can be offered to all Windows Phone OEMs. Further, this single solution can work across multiple solutions, from the PC, the tablet and the Xbox. Currently, Microsoft’s music component offers this, but Nokia’s (a superior music solution in many respects) is limited to Nokia devices.
So what of Nokia itself? The company has gone through several major transitions over its 50 years of business in the telecommunications field, and is once more transforming itself. The new entity will focus on navigation (the HERE business) and infrastructure (NSN), which is quite a gamble, all things considered. While HERE is a strong navigation solution, one needs to consider the longevity of this business model. For many consumers, navigation is fast becoming a free solution via their smartphone and, as such, we expect that the car navigation model may come under threat. After all, with larger smartphone screens, there is little obvious advantage gained by purchasing the in-car navigation version (especially when the option costs several thousand dollars). The more positive side, for HERE, is that Microsoft will continue to leverage this solution for its phones and other businesses.
As mentioned at the beginning, the acquisition is certainly a bold one, both for Microsoft and Nokia, with Microsoft betting that the combination of software and hardware will boost its market share considerably, while Nokia is gambling that the cash injection will allow it to reinvent itself once again. But bold may be the wrong adjective: gutsy, yes and a move that became inevitable for both parties’ as previous strategies have failed to shake Apple and Google (and by association, Samsung) market dominance. Microsoft’s previous cash injections to Nokia was not enough for the OEM to run the company at breakeven at a time when tremendous amount of marketing dollars had to be spend to capture market share – Microsoft’s acquisition should at least secure the necessary mar-com budget to stronger push the Windows Phone platform.