Nokia Saga: Microsoft’s Secret Return to a Monopoly Chuong Nguyen09/03/2013 Microsoft had announced that it had acquired Nokia’s devices business, giving it an in-house hardware brand and development for future Windows Phone devices, potentially branded as Microsoft’s Surface Phone following the company’s foray into the Surface tablet computing market. Microsoft CEO Steve Ballmer, who had been pushing for more branded hardware in transforming the software titan into a hardware and services company, may be envisioning the acquisition of its largest phone ecosystem partner as part of Microsoft’s “Nexus” strategy, similar to how Google has the Nexus line of phones that boast a pure Android experience. At first glance, as Microsoft’s strategy for Windows Phone is different than Google’s with Android, the deal may not make sense unless there are potentially more changes to how Microsoft operates its Windows Phone business. As it stands now, a Microsoft-owned Nokia may be just redundant. What Microsoft has in mind, though, may be far different that what we think–the company, through hardware and IP, may once again rebuild its empire back to the monopolistic glory days that Windows once was before Apple led the post-PC revolution.Advertisement Why Microsoft Purchased Nokia Justifying its shopping spree, Microsoft had created a presentation to why it is acquiring its largest Windows Phone ecosystem partner Nokia. The company is saying it wants to make more money and transform itself into a devices and services company to better compete against Google and Apple, bolster Windows Phone growth and development, and to capitalize on the post-PC revolution: • To accelerate its share and profits in phonesAdvertisement • To create a first-rate Microsoft phone experience for its usersAdvertisement • To prevent Google and Apple from foreclosing app innovation, integration, distribution and economics • To avail itself of an outsized financial opportunity fueled by growth in smartphone business Ecosystem Control Microsoft’s control of the Windows Phone platform is more rigid in a strategy similar to that held by Apple with that firm’s iOS mobile operating system designed for phones and tablets. Microsoft creates requirements for hardware specs in the hopes that doing so would create a uniform user experience regardless of brands and makes of Windows Phone hardware. Conversely, Google lets manufacturers do whatever they want with Android. This strategy, while beneficial at the high end in driving innovation (Samsung brought S Pen, simultasking was first introduced on the Kyocera Echo, and Motorola added features like always-on to the Moto X). On the low end, Google’s lax standards do not lend to a good experience, a market where devices like the sub-$100 Lumia 520 and Lumia 521 from Nokia excel and have brought significant market share gains for Nokia and Microsoft. The problem with this strategy is that Microsoft will face the same challenges that Google faces when it had brought Motorola Mobility in-house. Ecosystem partners may leave and some would feel threatened by competing with Microsoft’s hardware business, especially since they’re using the same OS. Microsoft may be perceived to give preference to its internal hardware division, which could cause rifts with other partners.Advertisement To overcome this, Google had gone to the other extreme. Rather than favoring Motorola, Motorola execs had later revealed that the division was essentially shunned by former Android head Andy Ruben and was given the complete opposite of favored status. Following this strategy could hurt Microsoft as it wants its Nokia division to succeed. So while Microsoft may be able “to accelerate its share and profits in phones” as it states as a reason for the Nokia acquisition, alienating partners may not help Microsoft achieve rapid market share for Windows Phone in general. Pushing Partners To Seek for Safe Harbors Elsewhere So while Microsoft VP Terry Myerson continues to say that Microsoft is committed to licensing Windows Phone to its partners, we’re unsure how HTC, Samsung, Huawei and others feel. Some of those partners turned to Windows Phone as a Plan B after feeling threatened from the Google-Motorola marriage a few years ago. Will Plan C for safety be in the form of throwing support behind Tizen? Perhaps Ubuntu or Firefox may be the next platforms to get a quick boost as ecosystem partners now worry about what the Microsoft-Nokia marriage would mean for their future stability. Microsoft Needs to Enhance the Platform, Not the Hardware Already known for its quality construction and Scandinavian styling with bold, bright colors, Nokia already does hardware well. Its debut Windows Phone device, the Lumia 800, won many accolades and awards, and the Fabula design language continues to this day on the Lumia 1020 flagship. What Nokia–and the rest of the Windows Phone ecosystem needs–is for broaden software and OS support, not Microsoft trying to say it could do Windows Phone hardware better than any of its partners now that it has gobbled up Nokia’s consumer-facing business. Nokia’s execs have been vocal in the past about saying what the ecosystem needs is apps. Nokia claims that in order for it to sell more devices, it needs to convince users to switch to Windows Phone. To do so, Microsoft needs to work better with developers in getting popular apps and experiences ported from iOS and Android to Windows Phone.Advertisement Additionally, there are still consumer-facing features that are missing as part of the Windows Phone experience. When Microsoft debuted Windows Phone 8 last fall, it had not so discretely told consumers that due to time constraints, it was not able to deliver a notifications screen, similar to what was available on iOS and Android. And though this isn’t sorely missed since the Live Tiles do show notifications, a consolidated display of notifications would be beneficial to end-users. Microsoft still hasn’t delivered that feature today via a software update. And while Windows Phone is a fluid experience in reality, on paper it trails Android without support for 1080p full HD displays (or even higher resolution ones), and quad-core processors. This is supposed to change this fall when Microsoft announces Windows Phone 8.1, or the GDR3 release of the software. In the interim, flagship devices like the Lumia 1020–aside from its camera–would appear to be lackluster when viewed in a vacuum when compared to the Samsung Galaxy S4, the HTC One, and the LG G2.Advertisement Microsoft needs to revamp Windows Phone as a platform, OS, and ecosystem first. Nokia already makes great devices and the HTC 8X is also widely praised as well. The shortcomings seem to come from the OS side, and buying Nokia wouldn’t solve those inherent problems. If Microsoft says that due to staffing and time constraint, features weren’t developed in time for launch, then it really needs to increase manpower in development, not get sidetracked with owning a hardware business. Microsoft’s justification for the acquisition “to create a first-rate Microsoft phone experience for its users” focuses on its own hardware and not Windows Phone. It’s unclear what that really means for the platform, but it seems that by inheriting Nokia’s trusted designs, Microsoft’s acquisition may be more self-serving rather than beneficial to the larger ecosystem. Twitter is already abuzz that the acquisition of Nokia may lead to the death of HTC, a strong Windows Phone partner who has been struggling in recent years. Can Microsoft Really Be Successful in Hardware? Aside from its Xbox business, Microsoft’s venture into the hardware space has not been quite as rich as Apple’s or even Google’s. It’s Zune brand for media players failed to gain market share against Apple’s iPod. And the KIN smartphone business was quickly abandoned. And more recently, the company had to write down nearly $1 billion for its Surface tablet business. It’s hard to say that similar experiences wouldn’t be carried over. The problem with Microsoft is that it really doesn’t have a clear strategy and it tries to melds together best practices from successful rivals in the post-PC space. From Apple, it is borrowing a controlled ecosystem experience, like what it had done with Zune, Xbox, and perhaps even with Windows Phone. Yet, for Windows Phone, it wants to similarly be like Google, licensing its platform like it does with the desktop OS space so that it could attract huge market share while at the same time delivering experiences that are rich and beneficial to users. Whether or not Microsoft will be able to deliver its full vision with Nokia and Windows Phone is still to be seen. Alienation Beyond Mobile We’ve talked briefly about alienating Windows Phone partners more now that Microsoft would compete against them in this space, but Microsoft has far greater risks than Google did when it acquired Motorola. For one, Microsoft is charging a licensing fee to use its OS whereas Google’s is free to use so there isn’t any cost to the Android partner. Secondly, many of Microsoft’s partners for Windows Phone also licenses Android. When they use Android, Microsoft also gets revenues from them by licensing patents that Microsoft assets Android infringes upon. So now, not only will Microsoft be a rival, a partner, and also an enforcer of patents, it will also have to dance around the dangerous politics of its businesses. As Microsoft runs multiple business units, the politics behind the Nokia deal will be high, and not just for mobile. Nokia is currently running a witty campaign for its Lumia 1020 camera phone against Samsung’s Galaxy S4 Zoom camera model. If Microsoft continues Nokia’s sharp-tongued ads in the future, it not only risks alienating Samsung, a Windows Phone licensee, in the mobile space, but a a hurt Samsung could mean bad business for Microsoft’s core Windows business. Though business users may still be dependent upon Windows, In the post-PC revolution, consumers find that they can be just as or nearly as productive using iPads and Android tablets and Samsung could slowly switch gears to promoting more Android than its ATIV-branded Windows products. And while Microsoft isn’t seen as the evil monopoly it once was before, this image could resurface again as Microsoft makes bigger hardware push while still developing the software. By being partner and rival, Microsoft may be seen as having an unfair competitive edge against its ecosystem partners and one that could endanger its legacy and cash cow businesses. Patents as Justifications The real reason for the acquisition, as we’ve alluded to in this editorial, may be for patents. CNET‘s Jason Hiner told his colleague Molly Wood on Twitter that “Saying we bought it for the patents is the new “No, we didn’t spend too much.”” And Ross Rubin says, “So much IP rhetoric in Nokia device acquisition rationale. Message is clear: Android licensees: we’re bringing more pain.” Unfortunately, though, the benefits to leveraging more intellectual property power for Microsoft isn’t as clear cut as it is for Google when it bought Motorola. Google was in a defensive position as Microsoft and Apple at the time were demanding royalties and waging war against its Android licensees–it wanted more patents to leverage lawsuit settlements on behalf of its partners. Microsoft doesn’t have that problem with Windows Phone. Under the old Windows Mobile ecosystem, Microsoft had promised partners that it would defend them in lawsuits if the platform they were using was challenged. It was a broad blanket statement and it worked for Windows Mobile. If Microsoft uses its new-found trove of IP to wage war on Android licensees, however, it may find itself in a losing position. Samsung and HTC, some of its biggest Windows Phone licensees to date are also the biggest Android smartphone-makers. Protecting its platform partners may also hurt the same partners on the other side of the fence if they use Android. The Secret Ulterior Motive In doing so, is Microsoft secretly rebuilding its empire? Waging war against Samsung, HTC, Huawei and others on the Android camp may not endanger Windows or Windows Phone support, but may lock these fiercely huge supporters of Microsoft’s rival platform into Windows Phone. With threats of imminent lawsuit for intellectual property infringement if they use Android–now more so than ever before thanks to more IP Microsoft had acquired with Nokia–Microsoft may now be threatening its partners with loyalty to its own empire. Here, IP isn’t leveraged on its own to wage war against Android, but it’s secretly maneuvered so that Windows and Windows Phone partners may become fearful of venturing too far away from Microsoft’s grips. This may lock in more support for Windows Phone with the threat of lawsuits being filed by Microsoft. But it would effectively bring Microsoft full circle back to the monopolistic empire it once was at the height of the Windows days before the post-PC revolution. And this end goal would make sense. It would satisfy Microsoft’s key points justifying its purchase of the Finnish smartphone-maker–that is, if Ballmer’s vision works out. • To accelerate its share and profits in phones • To create a first-rate Microsoft phone experience for its users • To prevent Google and Apple from foreclosing app innovation, integration, distribution and economics • To avail itself of an outsized financial opportunity fueled by growth in smartphone business A monopoly would increase profits and market share, hopefully if capitalism plays out create a first-class experience, stop Google and Apple from advancing in this post-PC space, and create more financial opportunities for Microsoft. Maybe we were too quick to judge Ballmer in his role as CEO. If this works, Ballmer may have one one swoop restored Microsoft to its glory days.