Microsoft and Nokia Nearly Betrayed Each Other

In an alternate reality, Microsoft (NASDAQ: MSFT  ) is making its own Surface phones without Nokia (NYSE: NOK  ) , and the Finnish company has left the Windows Phone operating system in favor of the ever-present Android.

They're two scenarios that never came about -- and Microsoft and its investors should be glad they didn't.

The Surface phone that never was
The Verge reported last October -- and again a few days ago -- that Microsoft had been working on its own Surface phone. Microsoft needed a back-up plan in case Nokia Windows Phones didn't pan out. After all, Nokia accounts for more than 80% of all Windows Phone sales. For Microsoft to keep all of its eggs in the Nokia basket would be unwise at best.

The Redmond-based company's announcement that it's buying up Nokia's devices and services division for $7.2 billion means the option of building a Surface phone completely from scratch may no longer be on the table. Once the deal goes through, Microsoft may just incorporate the Lumia line -- or pieces if it -- to make a Surface-branded device.

Considering Microsoft's current Surface tablet predicament, it may be a good thing the company never ventured out on its own. Microsoft had a $900 million inventory adjustment for the Surface RT tablets back in July and previously dropped the price of both the RT and Pro over the summer to combat lackluster sales.

Imagine Microsoft trying to convince consumers to buy a Surface phone when users have already decided Surface tablets aren't worth it.

Yep, an Android Lumia almost happened
A Surface phone competing with Nokia's Lumia would have been difficult enough for Microsoft. But Nokia was also working on an Android version of the Lumia, which could have spelled big problems for Microsoft.

Nokia Lumia 920T. Source: Nokia.

When the two companies teamed up in 2011, it was with the understanding that Nokia had the option to end the agreement in 2014. With Android making up about 80% of smartphone operating systems worldwide, ditching Windows Phone for Android would have crippled Microsoft's small -- and slowing growing --– place in the smartphone world. The Windows Phone OS claims just 3.9% of the smartphone market right now.

Nokia's Android plan was in response to the idea that if Microsoft launched its own phone, it may not need the Finnish company anymore. In its 20-F SEC filing back in 2012, Nokia said:

Microsoft may make strategic decisions or changes that may be detrimental to us. For example, in addition to the Surface tablet, Microsoft may broaden its strategy to sell other mobile devices under its own brand, including smartphones. This could lead Microsoft to focus more on their own devices and less on mobile devices of other manufacturers that operate on the Windows Phone platform, including Nokia.

As Nokia's mobile position in the world was ailing, switching to Android may have improved its situation, but it wouldn't have been cheap. The company was knee-deep in the Windows Phone platform and making the switch would have cost time and lots of marketing dollars.

A perfectly timed deal
With the recent deal, Nokia gets to dump the part of its company that has struggled over the last few years and Microsoft gets a piece of the puzzle it desperately needs to build its mobile future.

While owning Nokia's devices and services business is anything but a sure thing for Microsoft, investors should be glad that neither of the above scenarios saw the light of day. While the former partnership between the two may have been beneficial for a time, the two were toying with new directions that could have ultimately hurt both of them.

Going forward, Microsoft investors should closely watch Microsoft's cohesive strategy of building devices and services, and how it incorporates the Nokia business into that. The company has a long way to go to catch up to Apple and Google, but the Nokia deal should prove a better bet than going it alone with a Surface phone and competing with Nokia.

The titans of tech
The Nokia/Microsoft deal will change the tech landscape forever, and adds to the ongoing tumult in the mobile tech market. To find out which tech giants are 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.


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