Below are my thoughts on why Microsoft did the deal, and some ideas for how Microsoft can be successful in mobile.
Why did Microsoft Acquire Nokia?
Microsoft has realized that strengthening its hand in mobile is a critical part of its future. It has seen the mobile-centric successes of its tech industry peers, from Google, SAP, and Facebook, to Amazon, eBay, and IBM. Key industry influencers, from wireless operators to the development community, have are supportive of a third ecosystem to counterbalance Apple and Google.
One cannot really define the three-year-old Microsoft-Nokia partnership, as a "success" or a "failure". It has actually been in a state of smartphone purgatory -- they have made a lot of the right moves, and delivered some pretty good phones - but there was never that breakout, "must have" device that allowed the Windows Phone OS to gain meaningful share. As of the end of Q2 2013, according to Gartner, OS share stands at 79% Android, 14% iOS, 3% Windows (and rising), and 3% Blackberry (and falling).
Much of the analysis has focused on how "gutsy" a move this was for Microsoft. I think that's overblown. The partnership with Nokia, signed in 2010, was a first step in this direction: Microsoft acquisition of Nokia beta. Microsoft has tons of cash - the financial perambulations required to do this deal are not nearly as complex as what Verizon had to pull off.
Microsoft gains a number of important things in acquiring Nokia that are required for success in the device market: hardware design; manufacturing (Google's acquisition of Motorola was a seminal moment); global supply chain; key, mobile-oriented patents; and the vertical integration that has become critical to success in this business. Microsoft has had more failures than successes in the hardware business (Zune, Surface). But the Xbox was a hit, and an important platform for innovation in the consumer space for Microsoft. With Nokia, Microsoft needs to take the success of Xbox, and multiply it.
For those who have already counted out Microsoft/Nokia, one must consider how quickly things can change: look at where RIM and LG were five years ago, and where HTC, Motorola were three years ago. Or, look how quickly Huawei and ZTE have come out of nowhere to become important forces in the mobile device market, albeit in select geographies.
Six Things Microsoft Should Do
Microsoft will not be successful in mobile if it continues along the current trajectory of gaining a couple of points of market share a year. It must have visibility to attaining 15-20% share of mobile OS within three years. Here are some thoughts on how Microsoft should do it.
1. Buy Blackberry. If it weren't for its existing partnership with Nokia, a Blackberry acquisition would have made a lot of sense. But I still think that an acquisition of some parts of Blackberry would be a good idea, and Microsoft has the financial wherewithal to pull it off. There is still a lot of untapped territory in the enterprise with respect to mobile. Microsoft could capture substantial share of the remaining Blackberry installed base, and pre-empt Android, which till under-indexes iOS in the business market. There are important Blackberry assets that are valuable to the enterprise, among them: keyboard and haptics expertise; security; capabilities; NOC; BES servers, and so on.
Outside of the enterprise, there are other elements of Blackberry that are attractive. BBM, for example could be creatively integrated into Skype. Blackberry also has solid share in certain countries in Asia, with moderately priced handsets and the still popular BBM. In the fast-growing market for wearable devices, Blackberry's unique capabilities in bandwidth efficiency, low power usage, and store and forward capabilities, could be important assets.
2. Make a Stronger Play in the Enterprise. This is a corollary to the "Buy Blackberry" point above. But Nokia really is a consumer-oriented company at this point, which is one element of the Microsoft relationship that has never sat well with me given Microsoft's important role in the enterprise. Microsoft must find a more effective mobile play for its enterprise productivity products such as Office, SharePoint, SkyDrive, and even Skype. Microsoft must take the cue from competitors, such as Google, and peers in adjacent spaces, such as Netflix, to ensure that its key products are properly and contextually supported on all "screens". Microsoft should work more closely with corporate IT executives to design enterprise-grade, secure mobile devices that are effective companions to other devices used by mobile workers.
Security will ramp up as an issue. Just today, Samsung announced that a security suite from hot startup company Lookout will be integrated into its Android devices going forward.
3. Build the Ecosystem. There are Microsoft mobile devices, but there is no real Microsoft ecosystem in mobile. This is the stickiness factor that has been so important for Apple, and increasingly Android. And it's not just about having the requisite apps. It's analogous in some ways to online banking: once it's set up and you have all your payees and automatic debits set up, there's real pain in switching.
Combining its own assets with Nokia's provide Microsoft with a great opportunity to build a great mobile ecosystem. Although Microsoft must provide the requisite marquee apps that are in demand at other OSs (Instagram, etc.), they don't have to play the machismo "app count" game of Android and Apple.
Microsoft should define a select number of strategic categories that are synergistic with its business, develop best of breed apps within those categories, and make them work beautifully on their devices. Microsoft/Nokia based hardware and software/apps must work in much greater harmony than they have historically. These are categories where the companies' combined assets already have leadership, among them:
- office productivity
- collaboration (SharePoint, Skype)
- gaming
- navigation/location services
- health and fitness
- communications and messaging (Skype, Lync)
- imaging (already part way there with Lumia)
4. Success in Asia. The next wave of connected device growth is going to be propelled by Asia. We don't see it here, but Chinese OEMs such as Huawei and ZTE are already significant forces. With Nokia's Asha lineup, Microsoft has a fighting chance of gaining some share in Asia, although it's a very tough, low-margin game. But in certain emerging markets, smartphones or tablets are going to be a consumers' primary Internet access device, and Microsoft must have its fair a share of that market if it is going to be a global OS player.
5. Gotta Have a Tablet. It has been very difficult to break Apple's hold on the tablet market. Just about every PC and mobile device OEM has taken a whack at it. But as Samsung has demonstrated, the line between phone, PC, and tablet is blurring. It will blur especially in select markets where consumers and even enterprise workers do not have the luxury of having PC + phone, or tablet + phone. Nokia is rumored to be working on a tablet, and certainly Microsoft has assets and lessons learned from its experience with the Surface. It might take awhile to get it right, but I do think there's opportunity in a hybrid "phablet" product that could be a primary Internet access/personal productivity/media/communications device, in the future.
6. Innovative Business Models. It's tough to compete with Apple at the high end and the Chinese OEMs at the low end. Perhaps an "outside the box" way to gain share is to have a suite of perfectly good devices (as does Nokia now), and wrap a creative business model around it. Some ideas:
- Innovative handset leasing/rental programs
- Instead of operator subsidizing device, how about device OEM subsidizes some amount of network access (maybe with content partners)?
- Creative app bundles - for example high-end devices come with Office 365 bundled in
- Cloud-based access to any app from all devices
- Software/app licenses integrated with device sales
I am excited by this acquisition. Microsoft and Nokia are two companies with incredible resources, talent, patents, marquee products, and R&D capabilities. If Steve Ballmer, his successor, and the executive team can make all of these hum and place the right strategic bets, and execute on them, Microsoft still has a shot of being a meaningful player in mobile.
