How the sale of Nokia’s mobile phone business will affect Microsoft

Microsoft forges ahead with Steve Ballmer's vision to focus on hardware, software and services, with the $7.2bn acquisition of Nokia

With the $7.2bn acquisition of Nokia’s mobile phone business, Microsoft is forging ahead with the vision set out by CEO Steve Ballmer, to focus on hardware, software and services.

The timing of the deal is significant. 

Last month, Ballmer announced he would be retiring. Given that Nokia chief Steven Elop was once poised to take the top spot at Microsoft, some industry experts believe the Nokia deal puts Elop at the front of the queue to be the next Microsoft CEO.

Writing on the Seeking Alpha financial website, one hedge fund manager wrote: “Elop has been working with Windows Phone right from the start and he is in a unique position to understand the strengths, weaknesses and possible improvements required in Microsoft's mobile ecosystem from both the hardware and the software side. 

"Moreover, Elop also understands Nokia inside out and would be the perfect guy to advise Microsoft if it should acquire the Finnish phone-maker in its quest to transform itself into a 'devices and services' company.”

More on Nokia and Microsoft

Beyond the big question over the next CEO, what has Microsoft acquired?

Annette Zimmermann, principal research analyst Gartner predicts that BlackBerry would be the company left most vulnerable from the acquisition. 

“Now Microsoft has a reason to be aggressive in the enterprise. This is pretty much it for BlackBerry,” Annette Zimmermann said.

While Microsoft’s acquisition has the potential to establish the Nokia-based Windows-powered smartphone in the enterprise manageability, she said the consumer market is influencing enterprise strategy.  

“We cannot look at business IT without looking at consumers and so Microsoft needs to appeal to consumers,” said Zimmermann.

More like Samsung and Apple

The uptake of the Nokia smartphone has been much too slow for the Microsoft Windows Phone Platform.

According to Forrester analyst Thomas Husson, Microsoft/Nokia is still a relatively small player in the mobile market. This has an affect on company initiatives to support the platform by developing apps. 

In a blog post, he wrote: “While Lumia sales have increased over the past few quarters, they remained small with only 7.4 million units sold in Q2 2013. Reaching your audience on Windows 8 is still going to be a challenge for some time.”

So will Microsoft try to emulate Samsung and Apple by broadening the appeal of Nokia smartphones among consumers?  

Victor Basta, managing director of Magister Advisor said: “The risk for Microsoft is that this deal is a me-too strategy on the heels of Google’s deal with Motorola and a fundamental recognition that Apple’s content and hardware ecosystem is the only model that can work.” 

He says Microsoft is attempting to 'recreate Apple' by combining its software and hardware under one roof. 

According to Basta, keeping up with Apple is not likely to succeed. 

“Microsoft needs its own strategy in the marketplace, and Nokia alone will not deliver that strategy,” he said.

The untapped market

But does Microsoft really need to emulate Apple? 

Ovum principal analyst Tony Cripps said: “Nokia’s feature phones sell well in developing markets. A feature phones could be used to package a bunch of digital services to developing markets. This is potentially a long term bet for Microsoft.”

Given that more than a third of the online population already use services like Google and Facebook, if Microsoft is looking to build a hardware plus services business, it must either try to grab share from existing players or target developing markets. 

“No one is dominating the developing markets,” Cripps said. “At some point in the next 20 years there will be billions more people in the developing world going online. There is a lot of head room to change in developing markets so preparing for that and having a presence early on."

For the short term, Cripps said Microsoft will struggle to win over consumers given mobile phone companies limit their product range. 

“Carriers are very precious," he said. "We hear from smaller device manufacturers that they are likely to find only one slot in the operator’s product portfolio. Nokia may be considered a smaller player."

Developer ecosystem support

“Both Windows Phones have been largely aimed at consumer with media centric apps and services,” says Ian Fogg, an analyst and director, mobile and telecoms at IHS. 

From corporate perspective he said, Microsoft has not focused on enterprise features like VPN support: ”There is an opportunity for Microsoft to improve the product both for the enterprise and consumers.”

Although Microsoft has made significant changes to the innards, such as merging the Surface RT OS kernel with the Windows Phone OS kernel, outwardly, not much has changed, according to Fogg – which is not good news for consumers.

But despite having a common kernel, apps are not compatible across platforms, he said. 

“Today Microsoft has multiple OS, screen sizes and processors to support.” 

So unlike the PC era, where there was one common platform and a Microsoft software and hardware ecosystem, it is hard to see how Microsoft can tie hardware, software and services together.

Perhaps platform compatibility will become less important. 

Warwick Business School assistant professor of strategy Ronald Klingebiel belives HTML 5.0 will make the choice of actual smartphone devices less relevant. 

“Smartphones will turn into mere windows to the cloud. There will be little that differentiates one black, rectangular touchscreen phone from another, besides perhaps screen quality and battery life. Handset manufacturers without a suitable software platform in the cloud stand to suffer and Nokia is right to divest of its phone business. 

"BlackBerry should do the same. As for Microsoft, it remains to be seen whether it can leverage its still significant strength in desktop operating systems and software and migrate its customers to the mobile cloud,” said Klingebiel.

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