Past week, we were all shocked, but not surprised, by Microsoft's decision to acquire Nokia's phone division. But it makes sense. Nokia is the only OEM who bet the house on Windows Phone 8. Although growing steadily, Windows Phone 8 is not setting the world on fire. PC sales are only going in one direction since the last few quarters. Microsoft's own efforts on the Surface were a big dud in the market. All of these pointed to a serious change required in the setting. A bold move. Double or quits.
That is exactly what Microsoft's Nokia acquisition tells us. Its a doubling down move on mobile. I consider this to be a good decision by Microsoft, and a wise use of the monies they have been accumulating. Office & Windows revenue streams are in an extremely risky position as momentum is surely with mobiles and tablets.
The deal has to be approved by various regulatory bodies. The integration will take atleast a few months to show any signs of success.
Microsoft has always been in the licensing business, be it operating systems or office productivity software. The business model is simple. They earn an x amount of dollars for every PC that is sold in the market. But this model is not working in the new post PC era. No phone/tablet hardware manufacturer is ready to pay for software (Samsung, HTC). Certainly not for a late entrant like WP8. And besides, Android is free. The rest are vertically integrated (Apple, RIM).
With the notable exception of Xbox, and to some extent Bing, Microsoft's foray into digital media or consumer hardware have not been successful. Post PC era has arrived in the consumer space. It is only a matter of time before this shift happens in the enterprise market. Apple & Google are in a very good position to dislodge Microsoft from enterprise IT. Or worse, make Microsoft irrelevant.
This acquisition is Microsoft's attempt to change that.
With the Nokia acquisition, Microsoft gets :-
- A hardware manufacturer who knows how to build quality, differentiable hardware.
- An efficient distribution system and a global supply chain, with an extremely lucrative share in the growing markets.
- A strong patent portfolio, that can always come in handy.
- Expertise and experience in mobile computing, with ready to use platforms like "Here Maps".
These are good tools to have in your pocket. An integrated offering provides higher gross margins, as you save on markups and royalties. While many believe Microsoft was already late with WP7 when it launched a few years ago, there are some who are getting bored from both iOS & Android. And Blackberry is up for grabs. Plus, this market is crucial to Microsoft's future. We need to wait and see how things pan out for them.
I also think Microsoft can win over a few million in sales from other OEMs by giving away WP8 for free. It might even be possible to arrange a barter system wherein companies like HTC et al get to pay nothing for x million of phones provided they commit to y million of Windows 8 devices per year. Or no $5 per Android phone sold, if they also sell z million of WP8s.
With these benefits and economies in scale, Microsoft's bet to gain a significant market share in consumer space gets some wind underneath its wings. Whether that will be enough to take flight, only time will tell.
September 03, 2013