Microsoft Death Watch – Buys Nokia Smartphone Business

Nokia Smartphones
Nokia Smartphones

A couple of days ago I wrote about Ballmer’s impending retirement. One of the points I made is that Ballmer appears of have made the choice, that he isn’t being pushed out. A lot of writers have effectively written Ballmer off as a spent force at Microsoft.

Then Microsoft buys Nokia’s handset division…

A lot of analysts have been talking about the possibility of Microsoft buying all or part of Nokia for a long time. At one point Nokia was the 800 Pound Gorilla of the phone market, holding over twice the market share of it’s nearest competitors.

Nokia started downhill with Elop’s famous Burning Platform Memo. The subsequent adoption of Windows Phone as the main Nokia operating system was considered by many to be a mistake.

Then there was the hilarious attempts to avoid selling hot non-Windows devices like the N9 phone, which beat Apple’s iPhone 4S across the board. Who in their right mind wouldn’t push a phone which is popular, a device that the German Der Stern magazine recommended Germans go to Switzerland to buy because it was so good?

Nokia was being run by an ex-Microsoftie at the time. Several analysts have been of the opinion that Elop was placed in Nokia to prepare the firm for acquisition by Microsoft. And now Microsoft has acquired Nokia, something that has to have been in the system for at least the last six months (it takes that long to set up a deal of this size).

What does the Nokia Acquisition Mean for Microsoft?

Nothing immediately. This is a long term acquisition. Microsoft has bought a company that has been incapable of working profitably for several years, and which has no “hot” products. Also the time to market for mobile products means that any new devices won’t be on shelves for at least a year.

Nokia does have is a lot of experience with Mobile devices, a lot of patents, and production facilities. In theory these should be a huge advantage to Microsoft. The only problems are that the Telecom carriers have been less than impressed with Microsoft in the past, and consumers have been less than impressed with Microsoft too.

Phases to the Nokia Purchase.

Phase One – We’ll call this the shakeout. All of Microsoft’s customers for Mobile Operating Systems have to evaluate if they want to compete directly with Microsoft. In most cases the answer will be no. Since Microsoft doesn’t have to pay for the Operating System, Microsoft can afford to undercut them in the marketplace. Effectively Microsoft has killed the remaining Windows Phone ecosystem by purchasing Nokia.

Phase Two – Which will start concurrently with Phase One, but continue for a longer period. At this point all of Microsoft’s Operating System customers have to do an evaluation. It comes down to whether or not they trust Microsoft not to compete with them. Microsoft has delivered it’s own brand tablets (Surface RT), it’s own brand MP3 players (Zune), and it’s own brand phones (KIN). Microsoft has bought two handset manufacturers, Danger, and Nokia. What’s to stop Microsoft from buying a computer company, and introducing their own brand Desktop/Laptop computers? Money, that’s all. And Microsoft has a lot of money.

Phase Three – Fallout. At this point we are going to see either no change in Microsoft OS sales to other manufacturers, or a drop in sales. My own evaluation is that there will be a drop in sales due to Microsoft’s purchase of Nokia. The earlier purchase of Danger could be partially ignored by the OEMS, because Danger wasn’t a big player. Nokia is definitely a big player, no matter how damaged the company is. First the phone OEMS will move (though this might not be publicly visible – they may maintain a sole Windows Phone model to keep up appearances). The few remaining Windows RT tablet OEMS will probably move at nearly the same time. The computer OEMS will be the most interesting to follow. Some of them have already started to deliver devices running Google’s Chrome OS. Others may follow with specific devices to “test the waters” before making a decision. Again, Windows devices will probably still be available from them, but there will be a push on non-Windows devices, whether Chrome, Linux, BSD, or whatever.

Effectively Microsoft is going to loose business because of the Nokia purchase, unless Microsoft can turn the handset business around. Based on Microsoft’s prior experiences with consumer products, I believe that this is unlikely.

What Happens Next?

This is a damned good question. It appears that the Nokia purchase was funded by profits that Microsoft hadn’t brought back to the United States, to avoid being taxed on them.

Microsoft has a lot of money banked overseas, and is probably going to use it for further purchases (see Microsoft Death Watch* – Microsoft Buys Skype). There’ve been rumours that Microsoft is going to buy Dell. Microsoft is more likely to buy an overseas computer OEM instead of Dell, to use the overseas money, if Microsoft decides to get into the computer OEM business.

The Apple Clone Program

Microsoft has been playing follow the leader with Apple. Apple opened retail stores. Microsoft opened retail stores. Apple introduced a tablet computer. Microsoft introduced a tablet computer. Apple introduced an MP3 player. Microsoft introduced an MP3 player. To quote Tomi Ahonen:

Microsoft learned a powerful lesson then and it has been distorting Microsoft management thinking ever since: Apple envy. The Windows OS was a clear case of Macintosh-envy at Redmond. The Zune music player was a case of iPod-envy. Surface is iPad-envy. The termination of Windows Mobile, and the release of the bizarrely-incompatible new Windows Phone OS instead, is a clear case of iPhone-envy. Ex Microsoft dude Stephen Elop and his mad decisions about the product line of early Lumia – not one camera better than the iPhone, no QWERTY versions even as more than a third of loyal Nokia smarpthone owners at the time had a QWERTY based Nokia E-Series or other Nokia smartphone etc – that all can be explained away by iPhone-envy. The error-ridden Burning Platforms memo, for which even Elop himself has since that memo revised his opinion on many aspects he claimed wrong at the time – was again a case of Microsoftian Apple Envy.

This has to make the computer OEMS who use Windows very nervous. Apple has been building its own computers since 1976, and been fairly successful. There is a temptation for Microsoft to follow Apple, and cut out the middle man (Microsoft executives have blamed the OEMS for not producing good hardware in the past).

This would be suicide for a company with no connections to retail stores, but Microsoft does have those connections, having sold Windows, Windows Updates, Office, and a variety of other products to them. Whether or not a company like WalMart would want to carry Microsoft branded computers is questionable. When delivering new version of Windows, Microsoft has often given OEMS a set of specifications that were too expensive to immediately implement. The OEMS knowing that the market is price driven, delivered computers at a price point the consumers were willing buy at, irregardless of Microsoft’s minimum specifications.

Most Windows computers sold to consumers are low end units. When a comparison is done of Mac and Windows computers using the same general level of hardware, the Windows computers are as expensive if not more expensive than Macs, as are other types of devices from other manufacturers (check MP3 players for example). This was clearly visible with original pricing of the Surface RT product line, where Microsoft charged more and delivered less.

Apple as a company has had serious problems over the years. One of the most interesting from an analysts point of view was the Jean-Louis Gassée‘s attempt to drive up Apple’s profit margins which is partially documented here.

Apple appears to have learned from this incident. Apple products are not over-priced for the value they deliver. Apple computers are definitely more expensive than bottom end Windows computers, but are built to a higher standard, and come with a variety of useful software (to the point where Apple literally owns the music market because of it’s excellent GarageBand software).

If Microsoft decides to produce a Microsoft branded computer, it will be necessary for Microsoft to deliver something above and beyond what Microsoft delivers now.

With the Surface RT tablet, Microsoft depended upon Microsoft Office to be that something above and beyond. Unfortunately the Surface RT sold so badly that Microsoft had to write off $900 Million, and drop prices to attempt to move inventory, proving that Office is not the leverage Microsoft needs to sell tablets. Office might work to sell computers into the Business Market, but other markets have different requirements.

To sell a high end device, you have to have:

  1. Brand Name recognition for high end products (like Louis Vuitton)
  2. Top notch design staff
  3. An in depth understanding of the consumer market
  4. Solid sales chain

Let’s compare Microsoft to the Apple of 2000. Apple had 1, 2, & 3, but not 4. The opening of the first Apple Store in 2001 marked Apple’s start into building a high value sales chain.

Microsoft has 2 & 4.

Microsoft has never shown any understanding of the consumer market. While the X-Box 360 has sold reasonably well, the Sony Playstation 3 has outsold it worldwide. The PS3 with it’s Blu-Ray drive is capable of playing High Definition videos, the X-Box 360 is not. That’s part of what drove PS3 uptake, the other part is the games. A PS-3 game designed to fit on a 25GB single layer disc, can have far better graphics than the same game designed for the X-Box 360 with it’s DVD drive. The only reason that the X-Box 360 has remained competitive is that Microsoft forces Third Party Game Houses to sign a contract that says THEY CANNOT DELIVER A GAME THAT LOOKS BETTER ON THE PS3 THAN ON THE X-BOX.

Sales of the X-Box 360 have been driven by games which are exclusive to that platform. If Microsoft is unable to deliver quality exclusive content to the X-Box 360 platform (or the future X-Box One platform), sales will drop.

This is what Apple has done with the iLife suite of programs. GarageBand in particular has been a huge success with musicians, both amateur and professional. iPhoto has done well with amateur photographers.

Microsoft could quite easily produce an iLife clone. The company has produced a wide range of personal software in the past, including Front Page, Microsoft Money, Microsoft Works, Encarta, etc.  Some of those programs were considered excellent. Anyone working with websites will know that an ability to use “Front Page Extensions” are a common feature of most hosting services, even though Front Page is no longer available.

Any software, including iLife, can be duplicated in features and functionality, given enough time and money. Consider Grand Turismo and Forza Motorsport. Both games are effectively descendants of Taito’s Speed Race, which may be the oldest computer automobile racing software (the oldest I know about anyway). The aim in all these games, is to win the race, but driving as fast (and well) as you can. Both games have borrowed features from each other.

The problem is that Microsoft has more often then not messed up in the consumer market. Even when Microsoft hasn’t messed up, they often drop a market for little or no visible reason. Consider Microsoft Money – it had a large number of satisfied users, who got dumped by Microsoft for no apparent reason. This isn’t likely to leave consumers feeling warm and happy about Microsoft. The list of abandoned Microsoft projects is impressive.

What does all this mean?

That’s a damned good question. My personal feeling is that Microsoft’s purchase of Nokia is a part of Microsoft’s ongoing failure to understand the market, and Microsoft’s place in the market.

Four years ago I predicted that Microsoft would be bankrupt in five years. I was very obviously wrong about the time frame. I was also wrong about where the change in the market would start (I had tagged Microsoft Office as the big problem).

Instead the move happened in the Mobile and Tablet segments, two segments which I had mostly been ignoring. They just weren’t on my radar, until Apple announced the iPad. Yes, I’d been ignoring the iPhone, EVEN THOUGH I OWNED ONE.

A lot of analysts still haven’t realized that there’s been a paradigm shift. Microsoft realized that this shift was coming back in 1993, when Nathan Myhrvold wrote a memo titled Roadkill on the Information Highway. Microsoft’s problem is that every time they’ve tried to address the issue, they’ve failed.

Here’s why Microsoft has been working so hard on mobile:

Largest Operating Systems Of Computers When Smartphones & Tablets Included

Rank (was) – Brand – Units 2012 – Market Share 2012 (Market Share 2011)
1 (2) – Android – 462 M – 38% (23%)
2 (1) – Windows – 296 M – 24% (31%)
3 (3) – iOS – 272 M – 22% (21%)
4 (5) – Blackberry – 34 M – 3% (6%)
5 (4) – Symbian – 19 M – 2% (9%)
Others – 141 M – 12%
TOTAL: 1,224 M

Source: TomiAhonen Almanac 2012 from company and industry data.

Bet you didn’t know that Windows was in second place, did you? Even worse from Microsoft’s point of view, Windows Phone, Windows RT, and Windows 8 are three separate operating systems, which cannot run each other’s applications. Apple’s iOS is able to run Phone and Tablet applications. So can the Android devices.

As more people use phones/tablets as their primary computing platform, the sales of Windows will continue to drop further. It is possible that Microsoft Windows may have dropped to third place when Tomi produces the 2013 Almanac. Note that I said possible. We are in the Fall/Winter/Christmas buying season, the four months when over two thirds of computer sales fall.

Remember how I mentioned that I’d tagged Microsoft’s weakness as Office? The reason I’d tagged Office, is that Microsoft makes most of it’s profits from the Business Division (which is primarily Office). I’d assumed that the wide uptake on LibreOffice would eat into Microsoft Office’s market share.

I was wrong. Instead it’s the drop of devices capable of running Microsoft Office which is eating into Microsoft Office’s market share. Microsoft Office only runs on Windows 8 (we are talking new device sales), and Windows RT. That’s now only 24% of computing devices sold…

 

If total numbers (as compared to market share) of Windows devices capable of running Office continue to drop as IDC has reported, then Microsoft is in deep trouble, because a drop in the sales of Windows means a drop in the sales of Office. If Microsoft drives the OEMS away, the drop will happen more quickly.

We are talking Death Spiral folks. I may have been wrong on when, but I was right about it happening.

Regards

Wayne Borean

Wednesday September 4, 2013

 

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