Introduction

When Microsoft entered into its partnership with Nokia a while back, some wondered why Microsoft didn’t just buy the company and postulated that a buy would eventually happen. Well, this week, that prescience came to fruition as Microsoft purchased Nokia’s line of smartphones and the related portfolio of patents. The $7.7 billion deal brings to Microsoft its own line of Windows Phone-based handsets, placing the company in the same herd as Apple and Google with regard to full mobile vertical integration. With the Nokia buy, Microsoft now owns a line of handsets, a lot of patents, the mobile operating system, and an ecosystem, including retail outlets, weak as it is at present.

The reasoning

Some pundits say that Microsoft’s purchase of Nokia is a desperate attempt to keep the struggling Windows Phone operating system afloat as other vendors either drop some of the Windows Phone devices or opt to avoid the Windows Phone market altogether. The Windows Phone market is certainly struggling at present, with Microsoft seeking top app developers to help the company extend its ecosystem in order to compete with Apple and Google, which have become the two behemoths in the mobile space.

However, rather than desperation, it seems more like Microsoft’s purchase of Nokia’s assets was born more out of necessity, particularly as the two companies worked ever more closely on device and operating system strategies. Further, even though growth is slow, the Windows Phone share of the market is increasing. IDC estimates that Windows Phone comprises just 3.9% of the 2013 market and predicts that by 2017 that share will grow to more than 10% of the growing mobile market. Microsoft claims it can hit the 15% mark by 2018 with annual revenue of more than $45 billion. If those estimates are correct, then the Nokia buy was utterly brilliant as Microsoft now controls the biggest Windows Phone handset lineup on the market. Of course, if those estimates miss the mark, the buy may not look so good in hindsight.

Risks and rewards

This purchase carries a lot of potential rewards for Microsoft, but also exposes the company to some new risks. First, as is the case with the Surface Pro, Microsoft’s entry into the smartphone hardware market may scare away potential licensees and remove what could be additional options from the market. However, since Nokia already commanded a vast majority of the Windows Phone market, the impact here should be minimal, even if Microsoft loses all of its other Windows Phone 8 hardware partners. Further, if Microsoft can really manage to grow the Windows Phone market share to 10% or 15% from the current level, that makes the Nokia buy a brilliant investment.

Microsoft, however, has a really mixed track record when it comes to creating hardware. Obviously, the Xbox has been a tremendous success, but in other efforts, the company has been met with failure. One only has to look back just a few weeks to see Microsoft take a $900 million write down on unsold Surface inventory. It’s also hard to forget the company’s efforts with Zune. It’s not that Microsoft is incapable of creating good hardware and software; it’s simply been too little too late in many of their efforts.

In Microsoft’s favor, the international picture for Windows Phone isn’t nearly as bleak as it is in the United States. This is good news, assuming that Microsoft can maintain existing share of the market and increase it at a reasonable rate.

In another good news note, Windows Phone devices often receive pretty good to very good reviews. Microsoft needs to continue Nokia’s history of executing well.

What to do

Microsoft needs to do several things to increase Windows Phone’s share of the market. Here are five items that come to mind for me:

• Don’t make Elop the next Microsoft CEO. While I believe that Microsoft has the tenacity to pull itself up in the mobile market (eventually), I can’t see the board promoting the guy who many believe killed Nokia. Although Nokia is the biggest Windows Phone partner and has done reasonably well in the confines of this space, the fact remains that Nokia has truly suffered under Elop’s leadership. Microsoft needs a visionary leader who doesn’t miss on trends.
• Do whatever it takes to expand the app market. Although the company has clamored for developers for its platform, some of the most popular apps never make it to Windows Phone due to the lack of return on investment seen by some developers. Microsoft needs to find a way to get the most popular apps on the Windows Phone platform, whether this means developing its own version or paying the developer to do the work.
• Be excellent. Don’t try to make phones that are all things to all people. That’s Samsung’s game. Focus on a few broad areas and then create devices that are compelling and differentiated from the rest of the pack.
• Integrate. At one point, Microsoft had a vision to unify Windows, Windows Phone, and Xbox into an integrated whole where apps could roam between the three. No one else is doing anything like that. Even Apple continues to have differentiated environments. If Microsoft can get out in front (for a change) and figure out how to do this right, it could bode well for the long term.
• Get Windows Phone 8 up to par. Windows Phone is definitely different than the competition, but it still needs a lot of work. Microsoft needs to dedicate significant engineering resources to closing the gap between WP8 and other mobile operating systems. CNet article says it best.

Action Item: Microsoft has the tenacity and the cash to make Windows Phone a real player in the mobile space and, with the Nokia buy, Microsoft has top-notch hardware engineering resources to do so. Now, the company simply needs to execute and make a concerted effort to achieve double digit market share by 2017.

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