Trying the Apple strategy: Microsoft buys Nokia’s mobile business

Nearly three years ago, ex-Microsoft exec Stephen Elop became CEO of Nokia. The Finnish mobile phone company had once dominated the global market for cellphones but never figured out a successful smartphone product, instead dithering over a series of endless open source efforts as Apple’s iPhone, then Google’s Android took over. But since Elop became CEO in 2011, Nokia has converted its product line to Windows Phone while also keeping its Series 40 OS-based Asha line of not-quite-smartphones for poorer countries. (Microsoft gets the Asha name and a Series 40 license in the deal.)

Analysts and reporters have long suspected that Elop’s appointment was a way for Microsoft to test whether it wanted to own Nokia so that it would be able to make its own devices, as do Apple and, after its acquisition of Motorola Mobility, Google. Apple’s devices in particular benefit from tight integration of the hardware and software design, a direction Microsoft has been moving toward in recent years — tentatively with its Nokia collaboration and more directly with its poorly received Surface tablets.

As announced Monday evening, Microsoft is paying €5.4 billion (about $7.2 billion) for Nokia’s devices business — the Nokia Lumia devices will become Microsoft’s flagship devices — and licenses to its patents. Soon-to-retire CEO Steve Ballmer announced that Elop will run the mobile business at Microsoft, and the Xbox and Surface division will be folded into it with Julie Larson-Green still managing those pieces. The Windows Phone effort will continue to be independent, part of Terry Myerson’s Operating Systems group, so Microsoft can license it to other manufacturers with some degree of separation from the interests of its mobile division. Google has a similar arm’s-length relationship between Motorola Mobility and its Android effort.

If the deal is approved by regulators, Nokia will become primarily a provider of telecom gear in early 2014, transferring 32,000 of its roughly 100,000 employees to Microsoft and focusing on its networking infrastructure, mapping and location services, and patent licensing businesses. Nokia will not be allowed to use or license the Nokia name for mobile devices until 2016.

What does this deal do, beyond confirm Nokia’s failure to remain in the mobile business it once dominated? Some wags have suggested that the Microsoft-Nokia pairing was an attempt to tie together two drunks in hopes they would walk straight. If so, one drunk would fall down and be cut loose as the other started feeling more sober. Certainly, Nokia’s shift to Windows Phone has not helped it turn around mobile sales. Even as Windows Phone sales creep up to about 6 percent worldwide, it hasn’t been enough to offset the lost sales of Nokia’s discontinued Symbian-based devices, which had been losing share long before Nokia switched to Windows Phone.

Microsoft’s Surface effort has been a failure, amassing a $900 million loss and hundreds of millions more spent on unsuccessful marketing to get people to buy the heavy, awkward-to-use Surface RT tablets as well as the more capable but equally unloved Surface Pro tablets.

It’s hard to see how buying Nokia will change anything, because the fundamental flaw in both the tablets and smartphones is the same: Microsoft’s operating systems, not the hardware running them. Still, Nokia’s Lumia line has been getting some traction, especially as BlackBerry’s comeback attempt fizzled, leaving Windows Phone as the only alternative to Apple and Google.

Ballmer told Microsoft employees in announcing the Microsoft deal that “we cannot risk having Google or Apple foreclose app innovation, integration, distribution, or economics.” In other words, he sees Google and Apple pushing Microsoft aside as the PC market continues to decline and the Nokia purchase is a Hail Mary bet to take them on playing their own game.

It may be Microsoft’s only option, but being Apple requires a focus on quality, user experience, and platform centrism that Microsoft hasn’t demonstrated. Its refusal to listen to complaints about Windows 8 and now Windows 8.1 show it may be incapable of truly listening.

Microsoft seems more like Google in that it’s more a conglomerate of sometimes-related products that it can leverage to build customer loyalty; the Office/Windows/SharePoint combination is a great example. But Google’s free licensing has made it the most popular mobile operating system available, with most manufacturers having adopted it. By contrast, Nokia was the only real supporter of Windows Phone, with HTC and Samsung dabbling in it. I don’t see how Microsoft changes that game by buying Nokia.

In fact, Microsoft’s purchase of Nokia is likely to upset Windows Phone licensees. Similarly, Google’s acquisition of Motorola Mobility made other Android manufacturers nervous, which caused Samsung to make its Galaxy devices more clearly different and to invest in the Tizen open source platform. And Microsoft’s Surface effort caused some of its PC partners to criticize Microsoft publicly.

Microsoft knows that, so its announcement of the Nokia purchase makes a point to say that the deal will help strengthen all Microsoft mobile partners, such as bolstering Nokia’s Here mapping effort which is seen as a counterweight to Google’s dominant services. But the Microsoft announcement also touts the synergy that the Nokia purchase brings to Microsoft’s mobile designs.

You can’t have it both ways, and it’s clear to me that the Nokia purchase is about not having to rely on hardware partners any longer. After all, Nokia’s Lumias account for 80 percent of Windows Phone sales. It essentially is the Windows Phone company — is a stark contrast to Google’s Motorola Mobility, which is a minor player in that market.

Microsoft is going to own the challenge of blocking Apple and Google from dominating the post-PC market. It’s a bold, perhaps necessary bet — but not a sure one.

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