Why is Nokia worried about Microsoft?

COMMENTARY--The dissenting states attempting to secure harsher sanctions for Microsoft are building a rather diverse witness list.

Along with the usual set of Microsoft competitors such as AOL, Sun Microsystems, RedHat, Novell, Palm and Oracle (now withdrawn), the list includes telecommunications-oriented companies such as SBC Communications and Nokia. Ed Black, antitrust cheerleader and head of the Computer &Communications Industry Association (CCIA), was quickto claimthat "Their presence as witnesses brings great credibility to the case and to the remedies proposed by the state AGs." He went on to say that "There's an ever-growing number of companies who are increasingtheir involvement because they realize how much is at stake in trying to ensure a competitive marketplace."

One should be skeptical, however, whenever the head of an industry association dedicated to upholding the business interests of its members starts to crow about companies valuing the importance of a competitivemarketplace. One should be particularly skeptical when those supposedly altruistic corporations include Nokia.

What could Nokia have to fear from Microsoft? Microsoft is practically non-existent in the wireless space, save for a few notable exceptions, among them the Sagem WA 3050,the SiemensSX45 and Stinger-basedproducts from Sendo slated for release sometimethis year. Nokia, in contrast, has a 37 percentshare of the handset market and marginsof around 20 percent which have "defied predictions thathandsets would turn into a commodity business andprofitability would eventually fall." Nokia is the envy of the wireless world. It has been able to post profits even in a bear market which has seen competitors such as Ericsson and Motorola bleed red ink and make sharp cuts in their staffing.

Nokia's problem is the impending arrival of broadband wireless. Broadband wireless makes possible an entirely new market for services streamed to the ubiquitous cell phone. Broadband wireless isnon-existent in the U.S. and Europe (save for tiny Isle of Man). It's being rolled out in Japan, however, where NTT DoCoMo (sprung from Nippon Telephone & Telegraph (NTT), Japan's monopoly telephone service which wasn'thacked to pieces like AT&T) has managed to build a viable wireless services model built around it's popular iMode system. Suffice to say, broadband wireless WILL happen. It's just a matter of when.

Broadband wireless is all but useless, however, if cell phones in Europe and America continue to have tiny monochromatic screens with user inputcapabilities that are little improved from the phone in your home. This means that more functional cell phones are necessary if consumers are going to get any benefit from (and hence, have any demand for) nextgeneration wireless services.

That's why Microsoft's moves into the industry are so worrying to Nokia. Microsoft has extensive experience with consumer-oriented software, and though the wireless industry is still mostly hardware-oriented,the importance of software will grow as cell phones and the services they use become "smarter." Wireless service providers understand that, which is why companies like Deutsche Telecom are working with Microsoft in mobile services. To make matters worse, Microsoftreleased a set of design specifications for a SmartPhone at the recent 3GSM conference in Cannes, France. These specifications serve as blueprints for the construction of Pocket PC-based phones. Thislowers the barrier to entry in the handset manufacturing space by saving new phone providers money. They can spend less time designing the basearchitecture and more time finding ways to provide features that differentiate themselves in the market.

Microsoft failed to convince the big cell phone makers to use a Windows OS in any of their phones. In response, Microsoft proposes to unleash a swarm of smaller fabricators who will compete with the large phone providers, and each other, to drive down the price of smart phones. Though this isn't good news to Nokia, it should be good news to consumers and service providers (like Deutsche Telecom) who have an interest in low cost cell phones.

Nokia fears that Microsoft will do to the cell phone industry what they did to the PC industry. By licensing Windows to all comers and creating design guidelines (in conjunction with Intel) for PCs, Microsoft harnessed the competitive forces of thousands of OEMs around the world to drive down hardware prices to the obvious benefit of PC consumers. This turned PCs into a commodity product with the razor-thin profit margins such a market entails.

Nokia wants that to happen to the handset market about as much as a snowman wants an electric blanket.

Hence, they have thrown their hat in with the dissenting states in hopes that harsher sanctions might blunt Microsoft's ability to enter forcefullythe wireless market. This is hardly benevolence on the part of a company worried about the deleterious effects of monopoly. This is a plain old-fashioned attempt at heading off a potential competitor at thepass.

As has always been the problem with antitrust enforcement, it is easily swayed by competitors who hope to reduce the pressure posed by the subject of an antitrust investigation. You wouldn't trust hockey referees composed entirely of members of the opposing team. In the same light, you shouldn't trust companies whose profits are dependent on Microsoft's failure to be objective arbiters of what constitutes proper market competition.

John Carroll is a software engineer who lives in Switzerland. He specializes in the design and development of distributed systems using Java and .NET. He has also provided commentary about the Tunney Act comments.