Microsoft Needs Its Own Mobile Strategy, Nokia Alone Will Not Deliver

Microsoft Buys Nokia

Today’s announcement signals the end of an era, not just for Nokia, but also for Microsoft. Both companies have now embraced different strategies to be able to better compete in a completely different landscape where mobility is the driver. While Microsoft realised that it wouldn’t be possible to succeed without controlling the entire value chain, Nokia has realised that it needed a stronger ally with the financial muscle to continue driving its Lumia smartphones.

The market has moved from a product to an ecosystem battlefield. In this new world, phone makers need to excel in the hardware and design, but more importantly they need to excel in the user experience, as well as services and content offering, which is extremely cash demanding.

Moreover, as smartphone penetration continues to grow, manufacturers will only be able to increase their sales by attracting users from competitors, which requires huge investments. Nokia realised it didn’t have the financial resources to become the third alternative to Apple and Samsung in the smartphone segment. Instead of waiting to see whether that would change and eventually risk running out of cash, it decided to sell itself to the only company really keen to invest in Windows Phone.

Despite the partnership between Nokia and Microsoft on the operating system side, it was clear that both companies were moving at different speeds. Since the agreement was closed in 2011, Nokia has been able to launch several Windows Phone devices quickly, addressing the lower price points the market needed and launching services across the range of devices to differentiate from other players.

On the other hand, the development of the operating system has been slow and far behind other operating systems. The Windows Phone OS hasn’t been able to attract the same number of developers and consequently it failed to attract users, who preferred other platforms due to the availability of more apps, more features, and more devices. Microsoft was relying on Nokia to make Windows Phone successful and Nokia was relying on Microsoft to grow the ecosystem. Now it is time for Microsoft to take onboard its own destiny.

The tiny Windows Phone success has been driven by Nokia’s strong product development capabilities and the “blind” support from operators expecting to see much stronger support from Microsoft so they could have an alternative to Android and iOS. Therefore today’s agreement will be well received by mobile operators as Microsoft will align the software and hardware development, speeding up the Windows Phone operating system, but more importantly it will give operators access to Microsoft’s deep pockets, which it will use to promote Windows Phones.

We will probably see more agreements like this one in the future. The time for pure-play vendors has ended and the remaining ones haven’t understood that yet. The market will become more concentrated as economies of scale are important to survive in a market where profits will come from several slices of a pie rather than one single business, particularly if that business is hardware.

Mobile phone vendors will realise that the only chance to succeed is by merging with content providers, with bigger manufacturers, or less likely with an operator or a large retail chain. Whatever form it takes, concentration is key to survive as margins will continue to be squeezed by the dominant players. While Nokia has realised that and is taking action, others will continue to see their financial situation deteriorate and will take the same decision when bankruptcy is a reality.

Although Microsoft is buying the entire Nokia Devices unit, it is still unknown what the company will do with this segment. Feature phones continue to represent a significant percentage of worldwide shipments, but that will drastically change in the next few years. In the long term there is a small market opportunity in the segment, but in the short term it is important that Microsoft keeps the segment alive and profitable.

This will give it access to markets where feature phones are still the dominant segment and where the Nokia’s brand is still strong. These markets will see an explosion in smartphones in the next few years and users will likely replace their basic phones with a smartphone from a make they already know and trust. Attracting this first wave of smartphone adopters is crucial for Microsoft’s growth in these regions.

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Francisco Jeronimo

Francisco Jeronimo joined IDC in June 2008 as research manager for European Mobile Devices. Based in London, he is primarily responsible for research that covers mobile handset trends across Europe. He is also responsible for the European Quarterly Mobile Phone Tracker program. Francisco has been working in the telecom industry for 10 years in countries such as Japan, Finland, and Portugal. Before joining IDC, Jeronimo was responsible for the mobile devices business of LG in Portugal, in particular developing the open market channel and the business with Vodafone. In Portugal, he worked with all the mobile operators and managed the distribution channel of the second-biggest wholesaler. He launched a mobile software development company and did project management and consultancy in mobility for several companies in different industries. Before that, in 1998, he started working for Nokia R&D Center in Japan and then in Finland. He has a master's degree in management from Oporto University in Portugal and is a postgraduate in sales management from Lisbon University with a major in telecoms. He is fluent in English, Spanish, and Portuguese.

  • Victor Basta

    Microsoft effectively ‘acquired’ Nokia several months ago when it entered into a deal to license Windows Mobile to Nokia, making Nokia entirely reliant on Microsoft’s software for its mobile future. Nokia’s value has eroded progressively since, making the actual deal to acquire the mobile business even more attractive now for Microsoft. In the meantime Microsoft has had the chance to work with Nokia and learn about the business, so this now looks like a safe deal for Microsoft. The burning question, of course, is whether Nokia’s gradual erosion – in market share, value and perception – can be reversed.

    Microsoft must be betting that with more control they will be able to reengineer the business and gain market share. There is a huge array of challenges in the way though. There is fierce competition in the market and the competitor set in mobility has changed as fundamentally as the PC market changed when Microsoft entered it in the early 80s.

    The risk for Microsoft is that this deal is a me-too strategy on the heels of Google’s deal with Motorola and a fundamental recognition that Apple’s content and hardware ecosystem is the only model that can work. In fact Microsoft is attempting to ‘recreate Apple’ by combining its software and hardware under one roof.

    This still leaves the strategic question of how Microsoft will be competitive in the mobile space. A ‘me too’ strategy, catching up with Apple is not likely to succeed. Microsoft needs its own strategy in the marketplace, and Nokia alone will not deliver that strategy.

    Nokia employs 30,000 people too, which will make integration a costly, time-consuming and inevitably blood-letting exercise. This feels like a clean up deal at the end of an era.

    Victor Basta
    Managing Director
    Magister Advisors

  • Robert Rutherford

    Microsoft was slow out of the blocks in the mobile market, but in the past it has repeatedly shown that the more considered approach can pay dividends in the long run.

    News of the Nokia purchase will put pressure on some of the big names in the consumer smartphone market, but it’s the business implications that make this deal so interesting.

    Whilst firms like Apple, Samsung and HTC focus their attentions on consumer technology, Microsoft has been blazing the way in building a suite of business compatible devices. The acquisition of Nokia’s phone business could be the final piece of the puzzle.

    Robert Rutherford, CEO of IT consultancy QuoStar Solutions

  • Tony Cripps

    While enabling Microsoft to face industry rivals such as Apple, Google and Samsung on more equal terms, it also represents an indicator for the future of consumer tech industry more generally and a symbolic end to the mobile phone industry we’ve known until today.

    The sale of Nokia’s mobile phone business demonstrates conclusively the need for major consumer technology vendors to create ever deeper and wider offerings to consumers and ecosystem participants in terms of their device, platform and service offerings.

    This approach is no longer simply an option but a pre-requisite to competing successfully in this highly converged market (as outlined in Ovum’s Consumer Tech Market: Index 1H 2013).

    Nevertheless there is still much to resolve if the acquisition is really to have meaningful impact. While Microsoft and Nokia have jointly been increasing the money flow through the Windows Phone marketing faucet of late it will take mega bucks to take on Apple and Android head-cheerleader Samsung for marketing volume and volume shipments. We need to see that kind of commitment coming before we can really count Microsoft in the same league as its two main competitors.

    There is also a sense that while Microsoft has many of the key elements for consumer tech market success in place too many of those elements feel not quite at parity with their rivals.

    That said Microsoft has some areas of definite advantage over its rivals across this vast battleground, especially in gaming (via Xbox), in consumer-business crossover services such as VoIP (Skype) and in the ease of integration of Windows Phone with its own Office 365. Moreover, we shouldn’t forget its huge global installed base of PCs, which are as much a part of the complete picture as smartphones, tablets and online services.

    What is almost for certain is that beyond Apple and Google, Microsoft is the best equipped of today’s consumer tech giants to be able to put all the requisite pieces in place to succeed long term. Execution is another matter though and Ovum needs to see sustained progress in Windows Phone shipments over the next three or four years – 15% market share is a good target to aim for – to be convinced that Microsoft can establish itself as a real consumer tech market maker rather than a follower.

    The heat may be off for Nokia’s shareholders but for Microsoft’s investors the fire is only just being stoked.

    Tony Cripps, Principal Device Analyst at Ovum