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Microsoft's New Balancing Act

By Travis Hoium - Sep 4, 2013 at 9:00PM

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Now that Microsoft will be making smartphones and tablets, it puts the company in direct competition with its own customers.

Now that Microsoft (MSFT 1.70%) has agreed to acquire Nokia's (NOK 0.00%) device business, the company can't dance around the fact that it makes devices that compete directly with the customers it's trying to sell Windows 8 to. Mobile versions of Windows 8 are used by Acer, ASUS, and Dell in tablets and Samsung and HTC in smartphones, creating a conflict of interest for Microsoft following this Nokia acquisition.

It's possible that buying Nokia's device business will be genius in the end for Microsoft, but it undoubtedly creates a balancing act for management.

Is Microsoft isolating itself?
Microsoft hasn't exactly had a welcome reception from device makers for mobile versions of Windows 8. Google's Android is still the operating system of choice, accounting for 79% of all smartphones and 62.6% of all tablets sold in the second quarter, according to IDC. What we may be able to read into Microsoft's Nokia acquisition is that it's willing to eschew its normal partners in PCs and go it alone in developing smartphones and tablets. It's a strategy that's worked well for Apple, and Microsoft had to buy some of the expertise to catch up.

But Microsoft runs the risk of isolating itself by competing directly with its customers, even though Nokia was by far its largest smartphone customer, selling 80% of the phones running the Windows Phone OS. Will Samsung or HTC really put a lot of effort into the next Windows smartphone when Microsoft is putting all its efforts into Nokia? Will new partners even bother to come aboard if the deal takes off? 

In smartphones, an isolated Microsoft may not be a bad thing. But when you begin talking about PCs and convertibles, there's real risk in Microsoft's strategy. Acer, ASUS, Dell, and Samsung all make PCs and convertible devices that run Windows 8, and having to deal with Microsoft itself as a competitor has to be a bit troubling. Investors will need to watch how Microsoft positions itself over the next year or two because expansion into tablets beyond a weak Surface could be seen as a threat and make device makers look to Google or elsewhere for an operating system.

The future of Microsoft
On his way out the door, Steve Ballmer definitely set up Microsoft to go hard after the hardware space to create a "devices and services" company. For a company that's always partnered with others to build the actual hardware, that's a risky proposition, especially this late in the mobile game. Only time will tell if Microsoft-Nokia is a genius move that can put Microsoft on par with Apple, or another disastrous acquisition for the tech giant.

Fool contributor Travis Hoium owns shares of Apple and Microsoft. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Microsoft Corporation Stock Quote
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Apple Inc.
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