The announcement of Microsoft’s acquisition of Nokia’s Devices & Services business managed the impressive trick of being both surprising and expected at the same time. Certainly it has long been rumoured, and in many ways seems the logical conclusion to a long-running saga, but the timing was a little unexpected.
What we have, essentially, is Microsoft making a big investment in order to make sure that it does not become an irrelevance in mobile: an outcome which would see the computing giant’s influence severely limited in a world where mobile – be it smartphone, tablet or, in the future, wearable device – has become the pervasive method of consumer computing.
Despite having already spent billions of dollars jointly, Microsoft and Nokia have over the course of several years managed to achieve a market share which is still in mid-single digits. While there are some signs that the Lumia line of Windows Phone smartphones is gaining traction, this is all relative, and there is still some way to go to become an effective “third platform” to rival Google’s Android and Apple’s iOS.
The rationale behind the deal, as outlined in a press conference discussing the acquisition, is that the investment needed to grow Windows Phone to become an effective rival is disproportionate to the $10 that Microsoft receives per device to licence the platform. By owning a smartphone business, it has access to a greater share of the profit, justifying the bigger investment.
But spending $5.4 billion on a mobile devices business is a bold step, and brings as many challenges as opportunities – as Google will probably testify following its Motorola buy.
It would certainly be interesting to know the politics behind the deal, which comes only weeks after Microsoft announced the intended departure of Steve Ballmer, its CEO. Under his leadership, Microsoft has fared poorly in the mobile market, although not for want of trying – Windows Mobile did at least have some momentum for a while, and Windows Phone is widely well regarded despite its lack of obvious success.
Earlier this year, Microsoft announced a restructure that saw it put devices at the heart of its strategy, although at this point the world “mobile” was notably absent from its statements.
It will also be interesting to see how Microsoft’s other Windows Phone licensees – primarily HTC and Samsung – will react to the news that its platform supplier has bought a competitor. Both of these companies have already gone through the same with Google’s acquisition of Motorola, but in that case Android was their primary smartphone platforms and there was little sign of a viable alternative appearing in the meantime.
But for both Samsung and HTC, Windows Phone is little more than a side bet, with little evidence of a longer-term commitment to this platform.
Of course, Nokia has had its own problems to overcome. For quite some time now, it has been reporting poor financials, and has made significant cuts in order to shrink its operating costs to become more closely aligned with the size of its revenue.
And this has also limited its potential to invest. Certainly the pace with which it has been bringing new and – in recent months – appealing devices to market does not make it immediately clear where it has been skimping. But it has had its options reduced.
Indeed one thing that Stephen Elop has achieved in his restructuring of the company’s smartphone activities is the elimination of a “plan B”. Nokia had gone all-in on Windows Phone, and Windows Phone has not been the success that either Nokia or Microsoft would have wanted. In this case, a closer relationship with Microsoft in some form or other was the only logical conclusion.
Clearly, Microsoft believes that it can do a better job than Nokia could on its own, although it is not immediately obvious how this will manifest itself. It’s probably best to gloss-over Microsoft’s other attempts at mobile hardware – Surface, Kin – and the troubles it encountered growing its Xbox business and wait for a fuller update from the company before making any conclusions.
It will also be interesting to see what Microsoft does with Nokia’s feature phone business which, while providing the lion’s share of the handset maker’s volumes, has itself been troubled in recent times. In order for this unit to succeed in the face of a raft of competition from both new and existing vendors, it will need investment and focus – but low-end devices hardly fit with Microsoft’s core business.
In a statement, Microsoft said that this unit gives it “the opportunity to extend its service offerings to a far wider group around the world while allowing Nokia’s mobile phones to serve as an on-ramp to Windows Phone”.
But for sure what we are seeing is the end of an era in the mobile devices space. Of the big handset makers of old, Nokia and Motorola have struggled and been bought by computing companies (Microsoft and Google respectively), while Ericsson struggled (through the Sony Ericsson years) before being bought by a consumer electronics giant.
In the meantime, the market has been disrupted by another computing giant (Apple), while an Asian conglomerate (Samsung) displaced Nokia to become the world’s biggest handset maker. And with ambitious players such as Huawei and ZTE pushing hard to grow the value of their volumes, it is not likely to get any easier at the top any time soon.
The editorial views expressed in this article are solely those of the author(s) and will not necessarily reflect the views of the GSMA, its Members or Associate Members.