Microsoft's gamble on a mobile future

Analysts give mixed reaction to Microsoft's acquisition of Nokia's device division
Steve Ballmer, CEO of Microsoft, with Stephen Elop, CEO of Nokia.
Steve Ballmer, CEO of Microsoft, with Stephen Elop, CEO of Nokia.

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Following the announcement of Microsoft’s agreement to acquire Nokia's mobile phone business for EUR5.4bn ($7.2bn), analysts have offered mixed views om the deal, although most agreed that a change of strategy would be required for Microsoft to succeed in the mobile space.

Francisco Jeronimo, research director, European consumer wireless and mobile communications, IDC EMEA, said that Microsoft and Nokia had been “moving at different speeds” under their existing partnership with the pace of development of the operating system straining the partnership.

“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,” he said.

But with Microsoft soon to take ownership of Nokia, this dynamic is likely to change. “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,” Jeronimo said.

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Telecom operators are also likely to welcome the move after offering “blind support” to Windows Phone. “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,” Jeronimo said. “There [the] 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.”

Ronan de Renesse, principal analyst at Analysys Mason, said that the deal would help boost Nokia handset sales owing to Microsoft financial clout. “Microsoft has the ability to undercut its competitors and use mobile as a loss leader to gain global reach for its services and software ecosystem. No handset manufacturer except Nokia has been fully committed to Windows Phone platform in the past 12 months. Maybe it’s time for Microsoft to abandon its Windows licensing model in mobile,” he said.

Jeronimo agreed, explaining that Microsoft realised that it needed greater control of the mobile value chain, while Nokia required 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,” he said.

Danish research house, Strand Consult, took a more overtly negative view of the deal. “Microsoft's acquisition of Nokia does not solve the challenges Microsoft,” the firm said.

It added that Microsoft had purchased Nokia as an insurance to guarantee control over the distribution of their software. “If Nokia had been bought by Lenovo, Huawei or another player, Microsoft's role in the mobile world have been reduced to nothing in a short time.

“Microsoft has tried for more than 10 years to get into the mobile market, and they have previously experienced how their close partner HTC moved the focus away from Microsoft's products toward Android. Microsoft doesn’t want that to happen again so they purchased a $5.44 billion hedge,” Strand Consult stated.

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Emerging market play

While Nokia has so far failed to gain traction in the smartphone sector, it maintains strong sales of basic handsets and feature phones in emerging markets, which would offer a strong opportunity to Microsoft.

Ronan de Renesse said that Microsoft’s biggest opportunity is in the non-smartphone space. “Microsoft will gain a foothold in developing market via Nokia’s non-Lumia device portfolio; 45.5% of Nokia mobile device shipments went to Greater China, Middle East & Africa and Latin America in 2012. This will strengthen Microsoft’s position versus Google in connecting the next billion people.”

Jeronimo said that Microsoft would need to pay attention to the feature phone segment in order to keep the segment “alive”.
“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,” he said.

“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,” he said.
 

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