Does Microsoft’s Nokia Purchase Now Look Silly?

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It was incredibly interesting to see Google (NASDAQ: GOOGL  ) throw in the towel on Motorola Mobility and sell it to mobile up-and-comer Lenovo. For all of the hoopla that industry observers and investors alike made of Apple's (NASDAQ: AAPL  ) highly-profitable, vertically-integrated model of using hardware to sell a software ecosystem, it is starting to look like the horizontal model may be the better move for the vast majority of companies.

Microsoft's Windows Phone dilemma
Google's Android is free -- save for the royalties that the various Android vendors have to pay -- and highly customizable. While Google doesn't actually profit from the sale of any mobile devices with its software on it, it does hook users into its broad and deep ecosystem in a bid to capture that sweet ad revenue. Microsoft, on the other hand, is used to selling licenses of its Windows operating system for a pretty handsome up-front fee.

Unfortunately, while Google's Android is free and highly customizable  -- meaning more differentiation is possible for the hardware OEMs -- Microsoft's Windows Phone is neither customizable to any large extent, nor is it free. Given that Microsoft also owns many services in the vein of Google, it really looks like Microsoft is trying to double dip, once for the OS license and then for the service/ad revenue following that.

"Oh, I know," said Microsoft, "let's compete with Samsung!"
Instead of mimicking Google and, at the very least, forgoing profits on the Windows Phone license and just viewing it as an ecosystem-builder and gateway to search/ad revenue, Microsoft goes out and buys a failing smartphone vendor!

By no means was Nokia particularly successful with its Windows Phone efforts, which were probably largely driven by Microsoft. But Microsoft believes that under its wing, the former Nokia handset division can take 15% of the entire smartphone market.

That's a wonderful goal, but does Microsoft realize the following?

  • Microsoft will now be competing with companies that live and breathe low-margin, high-volume products like Samsung (NASDAQOTH: SSNLF  ) , as well as technology's fashion diva, Apple (NASDAQ: AAPL  ) ?
  • Does Microsoft also realize that Apple has been successful principally because it has owned the high end, and that Samsung has been successful because it has the cost structure -- Samsung builds almost everything in-house -- to be the lowest-cost producer in a commodity market?

It's great that Microsoft has its own OS -- of course, with Android as a springboard, other handset vendors can essentially roll their own de facto OS, too. But unless it can succeed in the same way that Apple has, and this is very unlikely, this venture is doomed to be a money loser for many years to come. Don't forget, Nokia's handset business was a money loser as a stand-alone unit.

Google just gave up
Google, which owned the arguably more successful Motorola Mobility, threw in the towel. Note that Google owns its own OS that the world already loves. The problem here is that the Nokia purchase seemed to be designed to ape the trend of vertical integration that we were seeing in the industry.

However, as these software-only companies have been finding out, hardware is tough business and not as easy as some may think from both a "getting the product right" standpoint and an "actually generating real profits" standpoint.

Google realized that it was better to be the ecosystem steward, and it is likely that after a year or so of dealing with Nokia, Microsoft may come to the same conclusion. However, it will take a bold leader, one unafraid of upsetting Wall Street in the short term, to realize that Microsoft needs to follow its own path rather than try to copy others. Microsoft's billions in free cash flow don't come from selling cell phones, and in the future, they won't need to, either. There are other, arguably more lucrative, markets that play to Microsoft's core competencies.

Foolish takeaway
Did Microsoft make the right choice in buying Nokia's handset business? Frankly, probably not. It seemed like a reaction to Google buying Motorola Mobility, Apple raking in untold billions, and Wall Street having unrealistic expectations for what the growth profile of a mature, highly profitable company like Microsoft should look like.

It'll be interesting to see how this all shakes out. 

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Read/Post Comments (16) | Recommend This Article (4)

Comments from our Foolish Readers

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  • Report this Comment On February 02, 2014, at 12:44 PM, KenLuskin wrote:

    How can one person (the author) be so WRONG, article after article?

    Microsoft's grand plan: Its all about the ecosystem

    Created by Ken Luskin February 1, 2014

    If Apple's (AAPL) customer loyalty is all about the ecosystem, why not for Microsoft?

    When you ask people, analysts, whoever, about why Apple won’t lose all their

    customers to lower cost, and/or better devices, they say its all about the ecosystem.

    The Cloud paradigm is about about providing an ecosystem of services.

    Google created and supports a free operating system called Android, so that the default settings drive people to their cloud services.

    Google's business model is providing free services, that are supported by advertising.

    It is very difficult to compete against something that is free. As Google slowly improves their software offerings, there will be constant pressure on Microsoft's model of charging for software.

    Microsoft's Board of Directors understood this situation a number of years ago, and began an aggressive long term investment program.

    Microsoft had 2 distinct choices

    They could greatly reduce R & D, increase dividends, and shrink away into a company like CA technologies, a provider of legacy software.

    Or, they could continue to use their world class R & D operation to create and grow a cloud ecosystem, which would throw off cash flow for eternity.

    The Xbox live subscriber base is a cash flow machine

    Microsoft now has 50 million Xbox live subscribers, and that number will grow dramatically with the release of the new Xbox One.

    The Xbox live 50 million subscribers is similar in size to Wall street darling Netflix's (NFLX) current subscriber base. How is it that Wall Street loves the Netflix business model, but does not like the Xbox business model?

    Netflix does not have the large costs of supporting a hardware infrastructure, but they have the large costs of continually purchasing content. The large base of Xbox live subscribers, attracts independent software companies to create content for the platform, similar to the Android and Apple App ecosystems. If the Xbox business was owned by Apple or Google, Wall street would be singing its praises, in my opinion.

    Search is key to devices

    Microsoft has invested Billions $$ into its search service called Bing, but it is still losing

  • Report this Comment On February 02, 2014, at 12:46 PM, KenLuskin wrote:

    Created by Ken Luskin February 1, 2014

    money. It is losing money because of the low volume of users. Google did such a good job of equating its name with search, and driving the vast majority of searches to its site, that it commands massive advertising revenues and profits.


    Since buying music on iTunes has been replaced by successful free music services, Microsoft has more attractive cloud services than Apple, in my opinion. What Microsoft lacks is the large APP community support that both Apple and

    Google’s Android command. Without a large base of devices that link with Microsoft’s Cloud services

    , those services will be underutilized. Microsoft can continue to lose money supporting these services because of their large cash flow from other businesses. But, this strategy makes no sense unless there is way to eventually earn a profit from the cloud services. The short term minded folks on Wall street that want Microsoft to exit from cloud services do not understand that there is a synergy between commercial software (Office) and devices. Microsoft has the cash flow and technical ability to provide an alternative platform in mobile that builds off its dominance in PCs.

    Microsoft gaining market share in mobile

    While Google's Android appears to have a lock on mobile OS, because of their superior App offerings, Microsoft has key strengths.

    Since Microsoft is already earning decent royalties from all the major mobile phone manufacturers, it is not hard to imagine them offering more windows based models.

    Most top reviewers give windows phone OS a thumbs up, with many finding the "tile" structure superior to either Android or Apple's iOS.

    Microsoft has all the key ingredients for success in mobile and the consumer cloud

    While Microsoft's execution and reaction to the new cloud paradigm has been slow, they now have all the pieces in place for a dramatic surge in market share.

    Nobody else owns all the key pieces for success in the consumer cloud.

    Microsoft will be able to leverage its key properties into a robust ecosystem that will attract more outside application developers, in my opinion. The example for this is the Xbox business. Microsoft has created a platform with significant outside content being created to run on it. Furthermore, the 50 million and growing paid subscribers is something that Google does not yet have. While internet advertising is large and

    Created by Ken Luskin February 1, 2014

    growing, TV based advertising is still quite a bit larger. Most people spend 5 to 10 times as much time consuming content from the comfort of their couch, while watching a screen that is far larger than any other device.

    Syncing the TV screen with full and easy access to internet content is a huge opportunity for cloud advertising revenues.

    Google’s Chromecast do

    ngle is not a long term elegant solution for linking a TV screen

    with the internet. As it stands now, Microsoft’s Xbox1 is the best and most robust

    solution available for linking a TV screen with internet.

    Google’s business is almost entirely depende

    nt upon advertising revenues. Obviously Wall street likes this business model and has awarded Google a PE multiple significantly larger than what Apple and Microsoft receive. Therefore, it makes sense for Microsoft to pursue a continuation of their cloud based strategy. But, this strategy is

    dependent upon devices having a default linkage to Microsoft’s cloud.

    Bottom line, Wall Street is myopic as usual

    Microsoft has been late and slow in mobile, but that does not mean they should just give up. The long term benefits to Microsoft of continuing to invest in new consumer device platforms, far outweighs the short term costs. If Microsoft were to end their quest to build an advertising and service fee cloud model, they would eventually be relegated to a very low margin business that competes with Amazon Web Services. Wall Street will almost always choose a quick dollar today, over many dollars down the line. That is why is the bulk of the financing for successful technology companies is done far, far, away from Wall Street, in Silicon Valley.

    Companies go to Wall Street to cash out, not for the risk capital to create and build world leading enterprises.

    Wall Street beats a very noisy short term drum, which can drown out the advice from visionaries living in quieter more contemplative places, like Omaha, Silicon Valley, and Seattle.

    Amazon’s Jeff Bezos now looks like a Genius…. but if the same short term minded

    people (Rich Sherlund) that are calling for a MSFT breakup had their way, Amazon would not exist today!

  • Report this Comment On February 02, 2014, at 12:47 PM, KenLuskin wrote:

    Microsoft's grand plan: Its all about the ecosystem

    Ashraf, I knew I could count on you to totally MISS the BIG PICTURE!!!

    You are a backward looking FOOL!

  • Report this Comment On February 02, 2014, at 12:47 PM, KenLuskin wrote:
  • Report this Comment On February 02, 2014, at 1:54 PM, GaryDMN wrote:

    Microsoft has long term staying power, Google doesn't. Google's is a fly by the seat of their pants company. Not just in their acquisitions, but everything they do is half baked and just okay and long was from polished. Consumers are fickle and Google's staying power is questionable, Microsoft's is not.

  • Report this Comment On February 02, 2014, at 2:34 PM, auggybendoggy wrote:

    GaryDMN. That's how I see it. MS is so deep in the business sector, that their staying power is ridiculous. Most people who hate MS overlook this or minimize it's importance. Yet if it were OSX running on every business machine, they'd all say how Apple has staying power.

  • Report this Comment On February 02, 2014, at 3:04 PM, NoWindows8LockIn wrote:

    Microsoft bought Nokia because they wanted a smartphone platform to initiate their strategy of vendor lock-in.

    Microsoft "invested" $2 billion in Dell for the same reason - to have a desktop platform to initiate their strategy of vendor lock-in.

    The biggest problem with their strategy, believe it or not, is the developers. Trying to innovate under Windows Phone, in its current incarnation, is downright filthy (unpleasant). Developers have grown accustomed to writing "apps" in Java for Android or Objective-C for iOS. Microsoft comes along and creates an entirely-new development interface that is simply disgusting to look at.

    As it turns out, that's how you create vendor lock-in: you create a programming API/services-framework/etc (a.k.a. "ecosystem") that is quite sticky, gooey...where the apps you create CANNOT be ported to an alternative platform.

    Microsoft is trying to create this situation, from scratch.

    They're going to fail miserably.

    The moment that any company starts putting a totally-unrestricted (running pure Linux or WP8) phone, all three - Microsoft, Apple, and yes, Google, will suffer, because the people who actually write the software, the innovators, will be freed from the shackles that currently bind them with these so-called-open-but-actually-closed ecosystems.

  • Report this Comment On February 02, 2014, at 3:48 PM, sdrew1976 wrote:

    Some very ignorant and regurgitated comments here....reposting or linking another article, that does not somehow make your opinion valid.

    Microsoft will fail, its a dinosaur and it products are failing, they all fall short in one particular area and it ruins the products user experience. Last night my was using her new surface2, a beautiful looking machine, its truly a designers masterpiece! But in a space of 2 hrs it froze up 5 times, also multiple incorrect paths opened while using it. The tiles look nice, but they are a very small part of the OS, they are the wrapping paper on the gift, but once you unwrap the gift you find a steaming piece of crap inside, people don't mind the smell of their own crap and one could argue that Microsoft loves the smell and doesn't seem to care that to the rest of us it is awful, that they need to test more and listen to feedback. My wife does a lot of business with Microsoft's mobile team, they are behind the times and border on incompetent, they are always late and always allowing bug filled software to go into production, they just don't care! Now Google is truley innovative and is focused on the future, there are comments here that state Google is buying and buying with no logic, no plan and no focus behind their corporate purchasing, well those com mentors clearly know nothing about business and apparently also cannot play connect the dots. Google is buying and reselling, but keeping patent ownerships on everything created by those companies, its genius, they are also buying every robotic firm that is in operation and that does show a very specific focus on a technology market which is already dominating the manufacturing markets. Google will be around long after Microsoft and Apple, because they are not focused on what they have done in the past, they are focused on the long term future and what part they will play in that.

  • Report this Comment On February 02, 2014, at 4:54 PM, st0815 wrote:

    MS bought Nokia because they'd have lost their last WP vendor otherwise - it wasn't a choice they wanted to make, as it makes the a competitor of the very companies they need as partners to establish their ecosystem.

    Google had similar problems: they needed a large source of telecom patents, buying a smartphone vendor was the last choice left. It also placed them into a competing situation with the companies they relied on as partners.

    Google however had a way out, they were able to jettison the company but hold on to the patents - MS is stuck. At least as long they want to try for their own ecosystem. And as long as they do that, they are excluding themselves from the apps market and are endangering their office dominance.

    The next MS CEO will be between a rock and a hard place - either go all in and risk the company on it, or admit defeat in that battle and live to fight another day for office and apps.

  • Report this Comment On February 02, 2014, at 5:37 PM, MIKE001 wrote:

    does this place that seems to be one sided all the time think they know what they are talk about? I news for you motley fool you are run and hire fools. you have been very wrong in the past and with this article you are wrong again.

  • Report this Comment On February 02, 2014, at 5:56 PM, KenLuskin wrote:

    WP/Nokia now has larger sales in many markets than Apple!!

    People in the US have this nasty habit of thinking the rest of the world does NOT exist... Most Americans are clueless about Apple's worldwide market share.

    MSFT will end up pricing Nokia/Windows phones at the same price as Android phones, and increase worldwide smart phone market share.

    MSFT can give buyers of their mobile products many important applications that neither Android or iOS can=


    The world wide smart phone market will become increasingly important, as developing economies continue to narrow the wealth gap with the US.

    The smart phone market is really only 5 years old..

    Look back at the early days of the Apple computer in 1982, which was 5 years after the first one was launched.

    So, sure right now Android appears to be the winner... but its still early days!

    MSFT will use Nokia to establish a large enough market share so they can entice enough developers to provide enough small apps (large apps are SKYPE and OFFICE) to ensure future success.

    I believe MSFT will end up selling Nokia when the ecosystem of apps is sufficiently large enough.

    At that time, MSFT will copy the Android strategy of providing the Windows mobile OS for free, to numerous other OEMs.

    Its a LONG TERM strategy!!

    The head of the MSFT server division has done a GREAT job of working with developers!

    I believe he understands what is necessary to recreate that developer community in mobile!!!

    The FACTS show that the NEW CEO has proven he knows how to work with developers in the server area.

    I think the NEW CEO will be able transfer his success in servers to mobile!!!

  • Report this Comment On February 02, 2014, at 6:01 PM, Dvoraak wrote:

    Not sure why nobody spots the real problem with Windows phones.

    "Hi and welcome to your favorite carrier. Remember that PC you bought last year with Windows 8?

    Remember how much you hate it?

    Well here's a phone to match!"

    Yeah there are many people who like W8..... but there are many many more who despise it.

    Good luck to the matching phone.

  • Report this Comment On February 02, 2014, at 7:09 PM, KenLuskin wrote:

    Windows Phone: Today Italy, Tomorrow the World!

    NOVEMBER 5, 2013 AT 3:03 AM PT

    Windows Phone’s market-share march continued apace during the three months ended in September, charting some significant growth abroad.

    In the third quarter of 2013, Windows Phone accounted for nearly 10 percent of all smartphone sales in the European Union Five (France, Germany, Italy, Spain, the United Kingdom), research firm Kantar Worldpanel ComTech said Monday. That’s nearly double the share the OS claimed during the same period last year.

    Even more noteworthy: Windows Phone now holds an 11.4 percent sales share of Great Britain’s smartphone market, and in Italy it has actually overtaken Apple’s iOS, surging to capture a 13.7 percent share.*

    In Australia, Windows Phone charted an equally impressive gain, rising 4.7 percentage points to nab a 9.3 percent share of new smartphone sales there. In Latin America, it increased its share by 1.3 percentage points, to 5.8 percent; and in the U.S. it grew its share year over year to 4.6 percent, from 2.7 percent. The operating system’s lone low point? China, where it lost two percentage points, slipping to a share of 2.5 percent.

    Kantar_smartphone_sept2013Clearly, Windows Phone is gaining momentum — largely thanks to sales of Nokia’s Lumia handsets. Recall that in the Finnish company’s recently reported third quarter, it once again posted an increase in Lumia sales. Nokia shipped 8.8 million of them during the quarter — a nice bump up from the record 7.4 million it sold in the quarter prior, and a vast improvement over the 2.9 million it sold during the same period a year ago.

    Despite this quarter’s impressive gains, Windows Phone remains far behind behind Android globally, and behind iOS in all markets save Italy. But it’s scrapping ahead. And the growth it’s showing in Europe and Latin America is encouraging, indeed — more so now that BlackBerry seems to have forfeited whatever distant chance it might have had to be a third-place hopeful in the smartphone market.

  • Report this Comment On February 02, 2014, at 8:44 PM, lee654 wrote:

    No !

  • Report this Comment On February 02, 2014, at 11:26 PM, techy46 wrote:

    "By no means was Nokia particularly successful with its Windows Phone efforts"

    The author should stick to writing about the semiconductor processor market and leave the software industry alone. Nokia D&S accounts for over 90% of Windows Phone sales. Apple's overpriced toys are for techno-wannabes, Google's are for socialists.

  • Report this Comment On February 04, 2014, at 8:42 AM, razblack wrote:

    why does anyone (including myself) bother reading this garbage website anymore... so biased and ignorant.

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Ashraf Eassa

Ashraf Eassa is a technology specialist with The Motley Fool. He writes mostly about technology stocks, but is especially interested in anything related to chips -- the semiconductor kind, that is. Follow him on Twitter:

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