Fine. Then Microsoft should buy its way onto Nokia phones, either through an outright acquisition of the company, or through a major strategic investment along the lines of its 2007 investment into Facebook, which has paid off handsomely.
Unlikely? Perhaps. Microsoft traditionally hates the hardware business, and only makes hardware when it has no choice, like when it decided to get into console gaming before Sony and other competitors started eating away the consumer PC market. (There’s no way Microsoft could have convinced another company to take the huge per-unit losses on the hardware to get established.) CEO Steve Ballmer said as recently as summer 2010 that a big mobile acquisition was not on the table.
He ought to reconsider, and Nokia should be the target. Here’s why:
- Selling mobile software is a crummy business. Microsoft charges no more than $15 per handset for its mobile OS. That means that Microsoft has to sell 60 million Windows Phones to make mobile a billion-dollar business. That’s not going to happen. And it can’t possibly get away with charging more because it’s in a weak minority market share position (unlike the case with PCs) and it faces a formidable competitor–Android–that costs nothing. Microsoft may hate hardware, but it’s the only way the company can make enough money in mobile to justify the investments it’s going to have to make to be competitive.
- Global market share. Nokia, for all its problems, is still the number-one phone maker in the world by far: in the third quarter of 2010, it shipped more than 117 million phones for 28% market share–far ahead of number-two Samsung with 71 million and 17% market share, according to Gartner. Nokia isn’t as dominant in smartphones, but it’s still got the number-one platform, Symbian with almost 36% share. (Those people aren’t buying Symbian phones, they’re buying Nokia phones that happen to run Symbian.) Microsoft’s other possible mobile target, Research in Motion, is nowhere close–it shipped about 11 million handsets in Q3’10 and has less than 3% market share for total handsets and 15% market share in smartphones.
- Enterprise. One big reason why Microsoft revamped its mobile strategy was because competitors–particularly Apple and Google–could use their mobile dominance as a wedge into the enterprise, eventually convincing customers to switch to non-Microsoft software for services like e-mail and document sharing. RIM has a stronger enterprise legacy than Nokia, but Nokia and Microsoft have been cooperating on enterprise mobility for years–Nokia was an early licensee of ActiveSync (Microsoft’s protocols for syncing Exchange e-mail with devices) and is the only non-Windows Phone company to support mobile versions of Office.
- Nokia is more affordable than ever. Microsoft has been hoarding cash again since the downturn, and the value of its cash and short-term investments stood at more than $44 billion at the end of September. Nokia’s market cap is about $38 billion. At the end of 2008, Microsoft had only $21 billion in cash, and Nokia was worth more than $50 billion.
Wouldn’t integrating the companies be a nightmare?
Yes, but Microsoft could make it as simple as possible by keeping Nokia’s smartphone handset business as an independent subsidiary with Windows Phone 7 and Microsoft’s online services (Bing Maps, Zune, and so on) as preferred platform providers. That might take a year to get in place.
What about Microsoft’s existing Windows Phone partners like HTC and Samsung? Wouldn’t this alienate them?
Absolutely, but Windows Phone’s market share is around 2% now. Microsoft can’t afford to wait another year to find out whether the partner strategy will work this time. Especially when Google has a two-year head start on the same strategy with a platform that costs nothing and has fewer restrictions. Sure, Samsung and HTC may continue to use Windows Phone 7 as a hedge against Google, but is that really all Microsoft hopes to be? A bargaining chip?
As for the rest of Nokia’s assets, Microsoft could keep Nokia’s non-smartphone business as a dying cash cow, spin off Symbian and MeeGo into a pseudo-independent open source organisation and let those operating systems find new backers or die slowly, and run Nokia’s mobile services in maintenance mode while gradually transitioning customers to Microsoft services.
So would Nokia bite? There would be huge internal resistance. But falling market share numbers don’t lie, and former Microsoft exec Stephen Elop–now Nokia’s CEO–is well-suited to make the case to the board and other execs.
The alternative for both companies is a slide toward irrelevance in the fastest growing and most important consumer technology market since the personal computer.