Microsoft just bought Nokia’s smartphone business for $7.2 billion. No matter how this turns out, the implications for both companies, and for the fortunes of other smartphone makers, especially in emerging markets, could be huge.
Windows phone partners
Until this merger, Microsoft did not make any actual phones, just the Windows Phone operating system, which anyone could license (Nokia, HTC, Samsung and Huawei all have done so). But Nokia is already selling 80% of Windows phones, and Samsung and HTC’s efforts to make Windows phones always seemed like half-hearted follow-ons to their primary, Android-based devices. Those deals remain in place, but it’s not clear how eager other manufacturers will be to compete directly with Microsoft. If, say, Apple were to license its OS, would any manufacturer really want to go up against the iPhone?
Asha, Nokia’s quasi-smartphone business in India
Microsoft didn’t just buy the Lumia line of smartphones from Nokia—aka its Windows Phone business. It also bought Nokia’s line of Asha quasi-smart phones. These devices are halfway in between “dumb phones” and smartphones in features and processing power, but Nokia has done an impressive job of making them into affordable alternatives to smartphones for emerging markets.
It’s unclear whether Microsoft wants to hold onto the existing Asha business. The company apparently bought it as a way to transition customers onto Windows OS devices, by keeping the Asha brand but replacing the Asha OS with Windows Phone. There’s some evidence this could work; the low-end Windows phone, the Lumia 510 and its successor, the Lumia 520, are one-third the price of a high-end Samsung or Apple device, and the 520 is now the most popular model of Windows phone, driving the ecosystem to a surprising second place in Latin America.
Of course, Asha is probably running out of steam anyway—as a niche platform outside of India (where it’s still quite popular), app makers are not developing for it, leading to a critical lack of, for example, the kind of chat apps that are very popular in emerging markets. But “Asha” phones that run Windows Phone would inevitably mean significant layoffs at Nokia—something about which pundits are already speculating. It would also mean the sunset of an entire mobile OS—the little-known (outside of India) Asha platform.
That other troubled once-great major mobile handset manufacturer can no longer count on a Microsoft acquisition to save it. Even without the Microsoft/Nokia merger, BlackBerry has already slipped into fourth place for its operating system and hardware, behind Windows Phone.
Microsoft is now pouring resources into Nokia, and Nokia is no longer in danger of abandoning Windows Phone on account of it being a stubborn money loser. That means BlackBerry also can no longer count on Nokia, its primary competitor for third place in the smartphone market, giving BlackBerry the upper hand (because Nokia won’t be resetting its entire smartphone business by switching to Android).
Microsoft and Nokia
Some very smart and experienced pundits think that the Microsoft/Nokia deal is a terrible idea. Mobile analyst Ben Thompson says there is very little this acquisition gets Microsoft that its previous partnership with Nokia had not already yielded. Om Malik of GigaOm calls it an act of “quiet desperation” that is unlikely to succeed, given that the real third-place finishers in the battle for smartphone hardware and software market share are in fact the myriad non-official versions of Android that have taken over in emerging markets.
Microsoft CEO Steve Ballmer’s language on the deal is not inspiring: He’s said that the key to success of a unified Microsoft and Nokia is to “drive volumes” which will “activate the software and the hardware ecosystem.” In other words, if Microsoft could just sell more phones, app developers would start making the software required to make them truly useful. While technically true, it sounds like management-speak out of Microsoft’s earlier days, when it was possible to boost sales of Windows products simply by selling them to businesses more aggressively.
Samsung just recently pulled ahead of Nokia in India, and if Microsoft bungles the transition of India’s Asha fans to Windows Phone—a transition that might not work even under the best circumstances—it seems likely that the already-popular South Korean maker of a variety of phones pitched at every price point in the market will be ready to meet consumer demand.
Huawei, ZTE and “no-name” Chinese handset manufacturers
The world is hungry for cheap smartphones, and pundits are betting that the open-source Android operating system from Google will overwhelmingly answer that need. Google is already aiming the next version of Android at cheaper and less powerful phones, which could accelerate this trend. Huawei, ZTE and Samsung are already leading the Android charge in emerging markets, but right on their heels are the “no-name” manufacturers of Android phones, which already produce 1 in 4 Android handsets. With Asha potentially dropping out of the race in India, the manufacturers could make further inroads into a huge new market.
Microsoft and Nokia
Nokia CEO Stephen Elop called the sale of a portion of Nokia to Microsoft painful but necessary. Aside from a sale, Nokia was out of options, having invested so heavily in the money-losing Windows Phone business, which means that this deal probably saved the company.
Microsoft thinks it can use the Nokia acquisition to triple the market share of Windows Phone by 2018. Windows Phone is showing signs of life in some markets, where its low-end devices (like the Lumia 520) are doing well, pushing Windows Phone ahead of Apple in areas like Latin America (that success is probably due to the lower cost of Windows Phone devices). Microsoft desperately needs a strong presence in mobile to offset the overall weakness in sales of PCs, especially considering that mobile devices seem to be directly cannibalizing sales of PCs. If the Nokia deal keeps Microsoft alive in mobile devices, this acquisition could ultimately be worth almost any price.