Will the Microsoft-Nokia Marriage Wow Consumers?

The tech giants have much work to do in the era of smartphones

Six years ago, Nokia (NOK) dominated the smartphone market, while Microsoft’s (MSFT) Windows Mobile was the second-place mobile platform.

Who would have predicted a consumer electronics manufacturer flogging cheap cell phones, a search engine company and a fading computer maker with a new lease on life would end up leapfrogging and dominating existing mobile giants the way Samsung (SSNLF), Google (GOOG) and Apple (AAPL) have?

We all know what has happened since Apple released the iPhone in 2007. The question is whether a Microsoft-owned Nokia can do something neither company has managed to do on its own in the past half-decade: produce a smartphone that consumers want.

Last quarter was a big one for Microsoft’s Windows 8 Mobile. It took the coveted third place in world smartphone operating system market share from a seemingly doomed BlackBerry (BBRY). Nokia’s Lumia line of smartphones also showed signs of life. Practically joined at the hip (Nokia ditched its own Symbian mobile OS for Windows and represents virtually all of that platform’s smartphone sales), the two have still largely failed to click with the consumers.

That third place for Windows 8 Mobile represents just 3.3% of worldwide sales. Nokia’s 7.4 million Lumia sales in Q2 are insignificant enough to get lumped in the “Other” category, trailing Sony (SNE), barely edging out BlackBerry and representing just one-tenth of Samsung’s smartphone volume.

If you use the argument that pairing the operating system to the hardware produces a better end product, then Microsoft-designed Lumia smartphones make sense. After all, that’s a big part of the appeal of Apple’s iPhone and iOS mobile operating system.

But what if Apple is the exception, not the rule? Look at Android. Android smartphones are churned out by dozens of manufacturers worldwide. Many have their own custom user interface layered on top of a usually outdated Android version. This results in a fractured mess of devices, OS versions and customized UIs that’s about the furthest thing imaginable from a coordinated end product.

Yet consumers have voted with their wallets and they overwhelmingly prefer this approach. Apple is losing marketshare (iOS dropped 24% year-over-year in Q2 and now stands at 14.2% of the smartphone market), and BlackBerry — the other company that pairs operating system and hardware — is in dire straits.

So what does the Microsoft-Nokia marriage hold for consumers?

The odds of third-party manufacturers continuing to make Windows smartphones (not that there were many), dropped to pretty much zero with this acquisition. Google can get away with owning Motorola and still have every smartphone manufacturer on the planet  – except Apple, Nokia and BlackBerry — line up to release Android devices because the platform has a 79% market share.

Consumers want Android, Google offers the operating system for free, so it’s a no-brainer for manufacturers — even if Motorola might seem to have an inside edge. There’s no lineup for Windows smartphones, Microsoft charges around $10 for a Windows Phone 8 license, and now it’s making its own devices in-house. Why would manufacturers even bother going there?

With the likelihood of losing third party manufacturers, anyone who wants a Windows Phone 8 smartphone will probably have to pick a Microsoft/Nokia model — for better or worse.

Now that Microsoft owns Nokia, there’s going to be tighter integration between operating system and smartphone.  Microsoft’s own hardware design efforts have had very mixed results. The Zune bombed, as the MP3 player failed to impress consumers who were hooked on Apple’s iPods. The Xbox line of video game consoles has done very well, but the Surface RT tablets have been another disaster — and, rather ominously, that failure represents the disastrous potential of Microsoft pairing its own hardware with one of its new mobile operating systems (Windows RT).

Then there’s the cooling effect Microsoft’s acquisition  could have on app developers. Smartphone market share and app availability are closely linked. That’s why both Microsoft and BlackBerry have had to offer cash incentives to developers to shore up their respective app stores. If other hardware manufacturers take a pass on Windows Phone 8, there’s a risk app developers will lose interest too. Of course, if Lumia phones turn into a smash hit and sell like hotcakes under Microsoft’s ownership, the opposite could happen.

Which will it be? Will Lumia smartphones drive Windows Phone 8 to the point where it’s more than a blip as third place, with app developers racing to get their top-sellers into Microsoft’s app store? Or will Lumias gather dust on store shelves as developers bail and upstarts like Firefox OS challenge for third place?

So far, investors seem to be feeling it’s more likely to be the latter, with MSFT off nearly 7% since the deal was announced. It seems unlikely that this PC dinosaur and a relic of the cell phone era contain the DNA needed for mainstream smartphone success. But we’re going to have to wait a year or two for the first of the Nokia phones developed under Microsoft to be released before we can get a sense of where things are going.

And we’ve all seen how much the smartphone market can change in two years.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2013/09/can-microsoft-and-nokia-make-phones-that-people-actually-want/.

©2014 InvestorPlace Media, LLC

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