September 3, 2013
Microsoft acquired Nokia's devices business for $7.2 billion (which is only 27% of Microsoft's 2013 earnings and just 9% of its cash and short-term investments). Microsoft bought the devices and some of the services along with the services of former Microsoft Office leader Stephen Elop, who will run Microsoft's Devices business. By all accounts, Stephen was a much-admired Microsoft executive when he left to run Nokia in 2010.
I'll leave telecom industry analysis of the deal in the worthy hands of my colleagues Thomas Husson and Charles Golvin. I'll leave journalistic speculation to the media. I'll leave personality analysis to the pop psychologists. But as a software+devices+services industry analyst, I'll share my analysis of how this acquisition changes Microsoft's position in the mobile mind shift.
- First, this acquisition is a clear stepping stone in Microsoft's transition from a software company to a software-led multiproduct company. Apple pioneered the model of vertical integration in devices: device+software+services. Google quickly mastered it. Microsoft has now proven that it is willing and able to make the tough decisions to make a vertically integrated product a cornerstone of its business model.
- Second, the timing of the acquisition after Steve Ballmer's recent retirement announcement feels coincidental to me. Steve Ballmer, I'm sure with Bill Gates' support, was the engineer of Microsoft's transition away from pure licensed software to first cloud services and now devices+services strategy. He would clearly have created the environment in which a decision to buy Nokia could happen.
- Third, Nokia's Lumia line (already a very very nice phone) accounts for the vast bulk of Windows Phone sales hence Microsoft's position in the mobile mind shift. So given the risk of betting the entire mobile business on a single partner, it is much safer for Microsoft to own the device as well as the software and services, hence the ecosystem, as my colleague Charles Golvin has analyzed.
- Fourth, the risk of not owning a phone is much greater than the risk of owning a phone and pushing other manufacturers away. This is the biggest risk of all, though, because it's contingent on how the devices+services market unfolds. Will pureplay manufacturers attempt to create their own software and ecosystems? Samsung and HTC and many others indicate yes. Or will they cede the services ecosystem to Google and Microsoft and just ship devices? Consumers will determine the answer. I believe that it's too early to read the tea leaves, but I think the position of manufacturing pureplays is significantly weakened by this acquisition.
Here's what I think will happen:
- Microsoft will elevate Stephen Elop's position, possibly to CEO, perhaps at the 11th hour of Ballmer's departure.
- Microsoft will become a significant third player in the mobile mind shift, still behind Google and Apple in market share, but a very vital competitor and supplier.
- The integration will go pretty well for the Lumia line but not for Nokia's other businesses, particularly in developing nations. Microsoft headquarters is a very long way, physically and emotionally from India or Indonesia or Africa. It will make it harder for them to focus on those markets.
- The quality of the Nokia Windows Phone experience will give more incentive to the Surface team to double down on Microsoft-owned tablets. Manufacturers like HP, Lenovo, and Dell will struggle to feel good about a Microsoft tablet even as they look for the best operating system for their own tablets.
- The Windows business unit will wrestle with a desire to exert more control over the quality of the PC+Service experience of Windows 8 computers. They will want more vertical integration to deliver a better product experience.
- Microsoft will spend a lot more money marketing and doing ecosystem business development for Windows Phone. It's now or never to make Microsoft a major third player in smartphones.
For the CIOs I serve every day, this acquisition should bring comfort. Microsoft is doubling down on mobility, and that can only be a good thing for you. You can have more confidence that your Windows 8 tablet trials will be joined by a renewed Microsoft commitment to devices+services across tablets and phones.