Why Nokia plus Microsoft won't equal Apple: It's much more complicated than that

Microsoft's acquisition of Nokia is aimed at building a devices and services strategy, but the joint company won't take the same form as Apple.
Written by Steve Ranger, Global News Director

Microsoft has been working on its evolution into a devices and services company, away from the services business it has traditionally been, for several years now with limited success.

Its acquisition of most of Nokia is the latest acceleration of that strategy — to move further away from the moribund world of the beige desktop and towards the sunlit world of smartphones and tablets.

Owning the desktop (via Windows) and building additional services on top, like Office or search, has been vital for Microsoft's strategy until now, so as our interest shifts from the desktop to the tablet or smartphone it's essential to Microsoft's broader business (even Azure) that it can retain that connection in some form. To be a winner in the business market it also has to be a winner in the consumer market, something that wasn't the case a decade ago.

As Microsoft's own presentation about the deal, announced on Monday, notes: "With the consumerisation of IT user matter at both home and work... We cannot risk having Apple or Google foreclose app innovation, integration, distribution or economics."

Nokia lashed itself to Microsoft's mast after losing out to iOS and Android in the smartphone market share stakes and with the limited success of the Lumia range so far enough to keep interest in Windows Phone alive, most analysts are seeing a certain amount of inevitability to the acquisition, even if they are split on what its biggest implications are.

Forrester mobile analyst Charles Golvin said the steadily diminishing investments by other Windows Phone licensees has left Microsoft with just Nokia as its standard bearer and added Microsoft now appears "poised to adopt a vertically integrated strategy more akin to Apple's".

But he said Microsoft's challenge remains how to unite the myriad services and brands — Windows, Nokia, Live, Surface, Xbox, Bing and more — into a cohesive experience that will command and cement customer loyalty.

"That's a tall order and one that should weigh strongly on the board's choice of a new CEO," he said.

Richard Holway, chairman of analyst TechMarketView, said given that Microsoft paid $8.5bn for Skype in 2011, the price it is paying for Nokia "seems extremely reasonable".

However, he added: "Our only 'surprise' now is the timing of the announcement. For such a big deal to come just days after Ballmer stood down seems mighty strange."

For Holway, there is also an opportunity for the enlarged Microsoft to step up its business mobility efforts: "There is undoubtedly a market opportunity for the creation of a provider of mobile solutions for the enterprise. Taking Office onto various mobile platforms. Providing secure emailing in a sector once occupied by BlackBerry."

But such a move carries its own risks — Microsoft's success has been build on being hardware agnostic and persuading device manufacturers to support it. Already its move into the tablet market with Surface will have unsettled its manufacturers which have struggled to come up with convincing form factors to tackle the decline of the PC. If Nokia's rumoured tablet appears too, this will further complicate Microsoft's relations with these partners who are essential for the success of Windows 8 (as well as Office and other products).

But, as Holway points out, "on balance, Microsoft needed to make a bold move into mobile. Not doing so would mean certain terminal decline. This way at least holds out some chance of survival."

Carolina Milanesi, research vice president at analyst Gartner, said by buying rather than just partnering with Nokia, Microsoft gets deeper integration, the benefit of its patents and removes any risk of Nokia either going Android or being acquired by someone else.

But success against iOS and Android will depend on how the companies integrate.

"Nokia benefits from higher R&D spend as well as more marketing budget. Microsoft benefits from a good relationship with carriers, good direct channel presence in emerging markets, the potential of going after more aggressively to the business market," she told ZDNet.

But for Milanesi, business is a secondary concern, even if it is an attractive target where Microsoft, and to a less extent Nokia, have experience: "First and foremost it needs to be about consumers. Enterprise are certainly a target especially considering the state BlackBerry is in but consumers make or break a phone vendor today."

From Milanesi's point of view, emerging markets need to be a longer term target for Microsoft — but the battle needs to be won in the mature markets first.

For Forrester principal analyst Thomas Husson, Nokia adds to Microsoft's developing market strategy. It's looking increasingly likely that the US and western European smartphone market is reaching saturation, so that most growth will come from emerging markets. Here Nokia's Asha devices could play a neat role as an 'on-ramp' for consumers buying their first smartphone. Tied in with a revamped tablet strategy this could open up a new front against Android in particular.

But Husson cautioned: "This is going to be a long journey. In some countries, Windows Phone 8 market share is now above five percent and close to 10 percent. It thus still offers a limited reach for developers and marketers.

"Nokia is indeed still massivley popular in some emerging countries but competition is very high with Far East manufacturers and low-cost Android devices. I think it will depend on Microsoft's new strategy for emerging markets beyond just mobile phones."

All of this shows the number of competing — and occasionally contradictory — demands upon Microsoft's management.

As the incumbent player in a fading market, Microsoft has a take into account those differing requirements as it tries to build for the future. For example, balancing Microsoft's business customers against the need to get into consumer tech, the need to build its own hardware business against the need to keep manufacturers onside, and building up a mobile business while protecting its PC heritage.

It's easy to look at Apple's integrated hardware and software model and the rich ecosystem that sits around it, but it's much harder to emulate.

Global coverage: Nokia Interim CEO: Microsoft deal makes us stronger | Even with Nokia devices, Microsoft wants to license Windows Phone to other makers | Does its Nokia buy thwart or fuel a possible Microsoft break-up? | Microsoft shows how to flush decades of Nokia goodwill away | Microsoft gets less than $10 per Windows Phone unit | Microsoft-Nokia deal: Reaction from the Twitter trenches | Elop drops Nokia CEO role to lead devices team under Microsoft deal

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