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News of Microsoft's (NASDAQ: MSFT ) acquisition of Nokia's (NYSE: NOK ) mobile device division early this week has dominated headlines. Was it a good idea? A bad idea? Analyst downgrades. Should Nokia investors take the opportunity to sell shares? While this is all fascinating stuff for a technology and finance nerd like myself, I'd rather examine what it means in relation to a larger trend: More companies are becoming more like Apple (NASDAQ: AAPL ) .
Microsoft in mobile
Microsoft has long been a platform company. It had the dominant platform in PCs -- it still does -- for more than a quarter of a decade. But it was late to the mobile game. It partnered with Nokia in 2011 to promote its Windows Mobile platform, and introduced its own tablet, the Surface, last year. Meanwhile, Apple and Google (NASDAQ: GOOGL ) had four years of market penetration already.
Now, with the PC market shrinking, and the mobile market growing extraordinarily quickly, Microsoft is making a hard push to stay relevant in the age of mobile devices. With the acquisition of Nokia's device business, it now has a vertically integrated mobile strategy -- it makes the software and the hardware -- just like Apple. The question it faces now, though, is will other manufacturers shy away from manufacturing Windows Phones due to Microsoft's new presence in the hardware business?
When Google got into hardware
Google made a similar purchase to Microsoft's recent deal back in 2010 when it bought Motorola. It has been able to keep its hardware partners, however, for a couple reasons. First, it promised to keep the Motorola Mobile division a separate subsidiary from the parent company, treating it just like any other partner -- which it has largely kept its promise on. Second, other manufacturers didn't have much of a choice -- it was either Android or develop a new mobile OS.
Microsoft doesn't benefit from either of these. Microsoft will absorb Nokia's phone business instead of keeping it a separate entity. Most of Windows' mobile partners don't really support the platform -- it's just not a big money maker compared to Android. Nokia was the only manufacturer producing leading-edge technology for the Windows Phone platform. Other manufacturers are taking six-month old Android models and adapting them for Windows.
Now, there's almost no incentive for consumers to buy a Windows Phone from anyone but Microsoft, thus no incentive for other manufacturers to support the platform. Until Microsoft can grow support for the platform on the software side (apps), it won't see great support on the hardware side. Therefore, it's likely Microsoft will favor its own manufacturing operations over its partners, who offer the platform little support.
Meanwhile, Google provides equal support to all of its partners, including Motorola, and its partners support it right back. Perhaps adopting a strategy similar to Google's, where it makes apps for all platforms, is Microsoft's best bet to get people into its mobile ecosystem. After all, it's biggest strength is as a software maker.
Why everyone wants to be Apple
In today's competitive mobile device market, software companies are more reliant on hardware companies than ever before. Apple took this route 30 years ago with a closed ecosystem that blurred the line between hardware and software. That line has gotten blurrier this decade with big software companies -- Microsoft and Google -- moving into hardware manufacturing through both internal developments and acquisitions.
Apple's strategy may have been about controlling the user experience, but it also turned out to be a great business strategy. Creating a popular device -- or three -- means huge revenue and profits for the company compared to a licensing strategy.
Microsoft intends to emulate the significant profit and revenue growth Apple saw with its own devices. Where it currently grosses less than $10 per Windows Phone device sold, Microsoft executives believe the acquisition will allow it to generate more than $40 per phone it manufactures and sells.
Of course, that all depends on Microsoft being able to grow its market share significantly in the next few years. It's estimated Microsoft will have to sell 50 million units just to break even. Nokia's current run rate is less than 30 million after selling 7.4 million smartphones last quarter.
Despite their recent entries into the hardware business, neither Google or Microsoft has been able to mimic Apple's success at pushing hardware. Apple's closed ecosystem keeps its customers extremely loyal, and its innovative technology of the last decade has drawn more customers in than ever. Even as investors worry about Android's multi-manufacturer dominance and superior devices from competitors, Apple sold more smartphones last quarter than Nokia did in the last year -- and it didn't have a phone newer than 6 months old.
Microsoft has a lot of work to do to become a profitable mobile device manufacturer. After a short experiment in manufacturing its own devices (the Surface), I actually think it's taking a step in the right direction with its purchase of Nokia's device business. Nokia has a proven track record of creating excellent hardware, but it's partnership with Microsoft has likely been the biggest thing holding its smartphone business back. It's up to Microsoft now to leverage those excellent hardware capabilities to grow Windows mobile.
For my money, however, I'm going to stick with the company that has proven it can operate effectively in the integrated hardware and software business. If everyone is trying to emulate a company, I'm going to buy the one everyone wants to be like.
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