There are two divergent strategies playing out in the mobile business right now. Apple's (NASDAQ: AAPL ) closed ecosystem keeps consumers in a uniform operating system and creates a consistent platform for developers to work on, although it means choice for both parties is limited. Google's (NASDAQ: GOOGL ) open-source operating system, Android, allows device makers to modify the operating system to suit their own devices. This has helped create a larger selection of products and taken market share from Apple, with the downside that users are on inconsistent operating systems, some of which don't even work well with Google's own systems.
Microsoft (NASDAQ: MSFT ) is trying bring in some of Apple's capabilities with its acquisition of Nokia's (NYSE: NOK ) handset business, building a consistent operating system and also having more device options.
Big risks for Microsoft
Apple's closed system has clearly been a success in smartphones and tablets, keeping consumers within the company's ecosystem of apps, music, and movies. This helps the company draw consumers into new devices like Macs and Apple TV, which can access a user's data and content. The closed system just makes sure all of these devices work together properly.
Microsoft will try to create a fairly closed operating system as well, but instead of leveraging smartphones to expand into tablets and PCs, it will leverage a dominant share of the PC market to draw in smartphone and tablet users. In the end, if Microsoft can create a more consistent platform than Google, it will be able to fit into the market between Apple and Google's offerings.
The strategy is working slowly in tablets. Windows 8 has grown as PC makers have expanded into convertibles and tablets and Microsoft has grown tablet market share from 1% a year ago to 4.5% last quarter. But Microsoft needs a critical mass in both tablets and smartphones to attract developers and users to its ecosystem. One brings the other and a reinforcing loop occurs.
That's why the acquisition of Nokia comes now. Nokia has been drowning in losses the past two years, leaving it financially incapable of competing with Apple and Samsung's marketing. The Lumia line of phones running Windows has actually gotten decent reviews and taken some share, it's just not enough to make either Microsoft or Nokia a big winner in mobile. Since Nokia accounts for 80% of the Windows smartphones, the easy option is to just buy Nokia and use Microsoft's balance sheet to fuel both research and development, as well as marketing of Nokia devices, even if it alienates some other smartphone manufacturers.
The risk is that Microsoft isn't an accomplished hardware maker. The Xbox 360 had numerous issues when it was launched, the Zune was a disaster, and the Surface hasn't been a hit by any stretch. Can it really pivot from software to being a "devices and services" company?
With risk comes opportunity
Despite the challenges facing Microsoft, the door is open in mobile. Apple is losing share and Google's open-source strategy has left a disjointed collection of devices running many different versions of Android. Microsoft will have to price its devices to compete with Android, but if it can offer seamless integration with hundreds of millions of computers running Windows worldwide, we've seen that consumers are willing to switch mobile devices when their old one goes out of style. Just look at how fast Android gained market share in smartphones. Will Microsoft be able to catch fire in the same way?
Copying Apple's strategy of creating both software and hardware in-house has its risks, but the opportunity is worth hundreds of billions of dollars. Someone is going to win this battle and there are only a few companies with the scale to dominate the mobile market. To find out which of these giants is set to rule the next decade, we've created a free report called "Who Will Win the War Between the 5 Biggest Tech Stocks?" Inside, you'll find out which companies are set to dominate, and we'll give in-the-know investors an edge. To grab a copy of this report, simply click here -- it's free!