Microsoft pins smartphone hopes on risky move: vertical integration
By Chantal Tode
September 4, 2013
Microsoft and Nokia already had a tight relationship
While Microsoft’s decision to purchase Nokia is a ringing endorsement of the kind of vertical integration embraced by Apple, there are also enough casualties of the strategy to suggest that getting it right will be a significant challenge for the software giant.
Unlike some other consumer electronics categories, mobile software and hardware have typically been separate ventures, with Apple the lone exception able to successfully support an end-to-end offering. With Microsoft’s Windows mobile operating system failing to pick up steam, the company is hoping to drive consumer interest by more tightly integrating mobile software and hardware, although this may not be enough to turn around sales.
“The lesson that Microsoft can learn from Google’s acquisition of Motorola is mainly that you have to do more than M&A,” said Carl Howe, vice president of research and data sciences at Yankee Group, Boston.
“You have to get engaged in the decision making processes, you have to know about the design, you have to commit early because these things take months if not years to develop,” he said. “It is a much different business than software, and they are going to have to learn the business.”
Success is elusive
Microsoft’s move is similar to Google’s acquisition of Motorola for $12.5 billion in 2011. However, that deal has not yet resulted in any significant gains in hardware sales for Google even though the Android operating system continues to make significant strides based on the sales of devices by other manufacturers, notably Samsung.
While it is not entirely clear that pushing integrated software, hardware offering was the main reason for the Motorola purchase, now that Microsoft is acquiring Nokia for $7.1 billion, this may put more pressure under Google to pursue an end-to-end strategy.
Others such as HP have also tried an integrated mobile strategy without much success. BlackBerry made it work for a while but is now struggling.
Microsoft also does not have a terrific track record when it comes to hardware. Sales for the company’s Surface tablet have been lackluster, the jury is still out on the Xbox and the Zune digital media player came and went in the span of five years.
Apple is the only one to do it successfully so far.
Nokia gets a lifeline
Still, as mobile becomes a dominant consumer electronics category, others such as Samsung and HTC may start to consider whether they, too, need an integrated strategy in order to survive.
Already, Samsung is talking more about Tizen, the Linux-based operating system while HTC is reportedly working on developing its own mobile operating system for China.
“It means for the rest of the industry that that end-to-end software and hardware play is going to be quite prevalent,” said Nick Spencer, London-based senior practice director for mobile devices, applications and content at ABI Research. “Google purchased Motorola, but they have not necessarily committed to that approach, but I think they may reevaluate the priority of it.
“It starts to leave all of those guys that rely on Android, like Samsung and HTC that don’t have an established software play, looking a little bit exposed,” he said.
“Samsung may have to reevaluate how committed it is to Tizen or perhaps make an acquisition.”
A Microsoft, Nokia merger has long been discussed. The reason it is happening now likely has to do with the fact that Nokia’s sales have been weakening and Microsoft may have been worried that another company might come along and try to acquire the Finnish handset maker.
Such a development could have been catastrophic for Windows Phone.
The deal also suggests just how bad things may have gotten for Nokia recently, with Microsoft issuing Nokia a $2 billion loan that will become part of the acquisition cost if the deal goes through.
“Nokia was kind of cash tight, which means their business was not quite as healthy as most people thought,” Yankee Group’s Mr. Howe said.
“In many ways, Microsoft threw a lifeline to Nokia,” he said. “One of the reasons they had to do that is if Nokia died, Windows Phone died with it.
“They had to keep this going to be successful.”
Little short-term impact
In the short term, Microsoft’s deal for Nokia is unlikely to have much of an impact on Windows Phone, which still significantly trails behind iOS and Android. The impact will be minimal because the two have already been working closely together to develop Nokia Lumia hardware using the Windows Phone operating system for a couple of years.
According to recent research from ABI Research, Android accounted for 80 percent of all smartphones shipped worldwide in the second of this year while Apple’s iOS accounted for 13.6 percent of smartphones shipped, its lowest share in three years.
Windows Phone came in third with 3.5 percent followed by BlackBerry with 1.2 percent.
What the deal does accomplish is giving Microsoft more control over the execution of its operating system on hardware.
“They still have the same challenges,” ABI Research’s Mr. Spencer said. “They may be able to integrate it into the hardware in a better way, but the fact is that they do not have ecosystem momentum at the moment at the consumer level and to some degree at the developer level as well.”
Without strong consumer interest in Windows Phone, wireless carriers have not put much support behind the devices.
At the same time, interest in developing mobile applications for Windows Phone has also been minimal.
Gaining the support of both of these groups is critical for a mobile device’s success.
“Carriers would quite like it to succeed, but they are not willing to over commit beyond what consumers are willing to purchase,” Mr. Spencer said. “If they can generate consumer demand, than carriers will commit more to it.”
In the mean time, it is clear that if Microsoft wants to be a winner in mobile, the Nokia acquisition alone is not going to be enough.
The company will also need to have a clearly defined point of differentiation in the marketplace.
“Nokia was already a captive Microsoft windows smartphone manufacturer – didn’t make any smartphones that weren’t Windows,” Yankee Group’s Mr. Howe said. “When they acquire them, the market share will change zero.
“This is the first step towards a much longer mobile strategy, and I think there is going to be have to be a lot more steps before we say, 'Oh, this is the direction they are going in,'” he said.
“They haven’t articulated what’s different about this other than, it will be more efficient for us to work together.”
Chantal Tode is associate editor on Mobile Marketer, New York
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