Microsoft bets the farm on Nokia play

05 Sep 2013

In the wake of Microsoft’s $7.2 billion buyout of Nokia’s handset business, it’s not surprising some people are comparing it to Google’s buyout of Motorola’s handset division a couple of years ago.

The deals are similar in the sense that both raised the specific question of how you can license operating systems to OEMs who are now your hardware competitors.

Google has managed to pull that off (so far), mainly by keeping Motorola Mobility structurally separate and making good on its promise that Moto won't get first dibs on the latest Android upgrades.

Microsoft OS veep Terry Myerson has said in a blog post that the deal changes nothing in terms of Microsoft’s goal of “building out a great ecosystem of partners, hardware and software alike.”

But as GigaOm notes, the problem is that the MS/Nokia deal is structured much differently than the Google/Motorola deal:

With its deal, Microsoft is doing the complete opposite. It’s absorbing Nokia’s phone business — not just Windows Phone, but Asha too — and bringing over Nokia executives at the highest level, all the way up to Stephen Elop. Phone manufacturing and 32,000 employees come with the deal as well. They’ll all be Microsoft employees and Nokia won’t be a separate subsidiary of the company.

The difference in the approach is monumental to hardware partners.

Obviously, it will be awhile before we know if that makes a big enough difference to OEMs that they’d rather walk away and go with Android, or upstarts like Firefox and Sailfish. If OEMs do decide to give up on Windows Phone, Microsoft could conceivably go the Apple route and make Windows the exclusive OS for Nokia-branded handsets. And unlike Apple, it would have a wider variety of handsets to bring to market.

On the other hand, it’s not clear how Microsoft will be able to build up its OS market share by owning Nokia than by partnering with them, as one analyst told the WSJ:

"Historically, I've always seen Microsoft as the place where mobile technology goes to die," said Michael Morgan, a mobile-industry analyst with ABI Research Inc. "I'm just not entirely sure if this closer owner relationship will allow them to make better phones than under their previous alliance."

Also, Apple is already demonstrating the limitations of that business model – Android knocked the iPhone off the top of the hill awhile back in terms of market share. Of course, Apple is still profitable, although perhaps not as much as Wall Street would like. (Also, it’s worth adding that Samsung is reportedly more profitable than Apple).

Anyway, it’s all speculation at the stage – the deal won't even close until early next year. Based on what we know so far, I don’t necessarily think the Microsoft-Nokia deal is doomed. I do think it means Microsoft has a hell of a lot to prove. But with a mobile OS market share of less than 5%, it also doesn’t have all that much to lose by taking a chance like this.

Also, credit where it’s due – Microsoft did at least prove through its three-year partnership with Nokia that it is possible to make a really good Windows-based smartphone with the Lumia – something many skeptics never expected Microsoft or Nokia to do. Microsoft could surprise everyone yet again by making this deal pay off.

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