Nokia Gambles on Microsoft in the Smartphone Wars

question 134

Essay

Nokia Gambles on Microsoft in the Smartphone Wars

An alliance may represent a low-cost alternative to a merger or acquisition.
Selecting an alliance partner must be done judiciously to avoid competing with a firm’s own customers or partners, cannibalizing its own product offering, or unintentionally transferring proprietary information and technology.
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Smartphones outsold personal computers for the first time in the fourth quarter of 2010. The Apple iPhone and devices powered by Google’s Android operating system have won consumers with their sleek touchscreen software and with an army of developers creating applications for their devices. In just three years, they have captured the largest share of the market. These developments put Microsoft’s core business, selling software for PCs, in jeopardy and have caused Finnish phone handset manufacturer Nokia to fall further behind in its efforts to compete with Apple and makers of Android-based devices in the smartphone market.

On February 11, 2011, Nokia’s CEO, Stephen Elop, announced an alliance with Microsoft to establish a third major player in the intensely competitive smartphone market, currently dominated by Google and Apple. Under the deal, Nokia will adopt Windows Phone 7 (WP7) as its principal smartphone operating system, replacing its own software, which has been losing market share. Nokia and Microsoft are betting that the carriers want an alternative system to iPhone and Android. While some WP7-based products were anticipated in 2011, a substantial increase in volume was not expected before 2013. Nokia could have partnered with Google, as have many handset manufacturers. However, it would require that the firm compete with the likes of Samsung, HTC, and Motorola—all makers of Android-powered smartphones.

Under the agreement with Microsoft, WP7 becomes Nokia’s primary smartphone platform; Nokia also agreed to help introduce WP7-powered smartphones in new consumer and business markets throughout the world. The two firms will jointly market their products and integrate their mobile application online stores such that Microsoft’s Marketplace (applications and media store) will absorb Nokia’s current online applications and content store (Ovi). Nokia phones will use Microsoft’s Bing search engine, Zune music store, and Xbox Live gaming center and will work with Microsoft on future services to expand the capabilities of mobile devices. However, the deal is not exclusive, for Microsoft will continue to have other hardware partners. Microsoft also agreed to invest about $1 billion in Nokia over a period of years to defray development and marketing costs.

The alliance enables Nokia to adopt new software (WP7) with an established community of developers but that has sold relatively poorly since its introduction in late 2010. With the phase-out of its discontinued Symbian operating system over a period of years, Nokia will be able to reduce substantially its own research and development and marketing budgets. Microsoft will also benefit from Nokia’s extensive intellectual property portfolio in the mobile market to strengthen the WP7 system. For Microsoft, the deal represents a major opportunity to boost lagging sales in the mobile phone market and gives it access to Nokia’s brand recognition.

Despite having been an early entrant into the smartphone business, Microsoft had been unable to gain significant market share. Over the years, Microsoft has struck deals with many of the world’s best known cellphone manufacturers, including Motorola and HTC Corp. But these alliances were hampered either by execution problems or by an inability of Microsoft to prevent handset makers from shifting to other technologies, such as Google’s Android operating system. For example, after failing to deliver mobile phone technology that would compete with Apple’s and Google’s innovative systems, Taiwanese handset manufacturer HTC lost interest in manufacturing smartphones based on what was then known as the Windows Mobile operating system and now makes many different Android phone models in addition to devices powered by WP7. Even though Microsoft’s Mobility software was substantially revamped and dubbed Windows Phone 7, it was only able to capture 2% market share in the fourth quarter of 2010 following its introduction early in the fall of that year.

Elop also announced that effective April 1, 2011, Nokia would be reorganized into two business units: Smart Devices and Mobile Phones. The Smart Devices unit would focus on manufacturing the new Windows Phone 7 devices. The Smart Devices business must compete in the smartphone market against the likes of those producing handsets powered by the Google operating system, Blackberry, and Apple with only the Windows Phone 7–powered phone. The Mobile Phones operation would continue to develop phones for Nokia’s mass market. The mass market feature-phone business represented Nokia’s core business, in which the firm would produce large volumes of phones for the mass market differentiated largely by their features. While this market had proven lucrative for years, it is now under increasing pressure from mass-produced Chinese phones.

Investors expressed their disapproval of the deal, with Nokia’s stock falling 11% on the announcement. Similarly, Microsoft’s shares fell by 1% as investors expressed concern that the firm had teamed with a weak player in the smartphone market and that the two-year transition period before WP7-based smartphones would be sold in volume would allow only Android-based smartphones and iPhones to get further ahead.

The partnership faces many challenges. With Samsung, HTC, and LG having invested heavily in Android-powered devices, they have little incentive to commit to WP7-based devices. Their strategy seems to be to use the WP7 system as an alternative to Android in its negotiations with Google, threatening to shift resources to WP7. Furthermore, Nokia is a European company, and Europe is where it has greatest market share. However, Microsoft has had a checkered past with EU antitrust authorities, which sued the firm for alleged monopolies in its Windows and Office products. European companies have been much faster to adopt open-source solutions, often in an effort to replace Microsoft software.

The partnership does, however, have potential advantages. Nokia remains a powerhouse in feature phones, and, if it can successfully transition these devices to the WP7 operating system, it may be able to increase market penetration sharply. Android may be vulnerable due to a number of problems: platform fragmentation, inconsistent updates and versions across devices, and the operating system’s becoming slower as it is called on to support more applications. WP7, at this time, has none of these problems. If customers become frustrated with Android, WP7 could gain significant share. As always, time will tell
-Conduct an internal analysis of Nokia and Microsoft (see Chapter 4).

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Definitions:

Endocrine System

A system of glands that secrete hormones into the bloodstream, regulating processes such as growth, metabolism, and mood.

Sensory Systems

The parts of the nervous system responsible for processing sensory information, enabling individuals to perceive their surroundings.

Sensory Neurons

Sensory neurons, also known as afferent neurons, are nerve cells within the nervous system responsible for converting external stimuli from the environment into internal electrical impulses.

Motor Neurons

Neurons that transmit signals from the brain or spinal cord to muscles or glands, causing them to act.