Did Nokia’s Android Dalliance Spur Microsoft’s Purchase?

by Brad Moon | September 20, 2013 11:51 am

Microsoft’s (MSFT[1]) Windows Phone 8 is critical to the company’s future success in a world that’s going mobile.

Through a combination of aggressive marketing, competitive features, a push for apps[2] and some helpful bumbling by BlackBerry (BBRY[3]), the platform has seen significant growth this year. Windows Phone 8 is now in third place globally for market share at 3.7% and is the fastest growing mobile OS — although that’s relatively easy to pull off when you start low, the trick is to maintain the growth rate.

However, Microsoft was almost entirely reliant on Nokia (NOK[4]), whose Lumia smartphones accounted for a whopping 80% of that Windows sales volume[5]. And Nokia was considering jumping ship to Android.

At the time the blockbuster purchase was announced, Microsoft’s $7.2 billion deal[6] to buy Nokia’s Devices and Services unit was presented as the most effective way for Microsoft to bring Windows Phone hardware development in-house. It fit Steve Ballmer’s vision to turn Microsoft into a devices and services company.

The acquisition also had the potential to fit neatly into the Ballmer succession plan[7] by bringing back former Microsoft executive and current Nokia CEO Stephen Elop — the guy who made the call to skip Google’s (GOOG[8]) Android as Nokia’s platform in favor of Windows.

Things are rarely so neat and tidy, and it only took a matter of days before news began to circulate that Nokia had Android running on its Lumia smartphones[9]. With Nokia’s Windows Phones deal set to expire in 2014, this could have been written off as a pressure tactic designed to extract more favorable terms from Microsoft the next time around.

Things get uglier, though. It turns out that Nokia’s Android experiment had gone much further than engineers playing experimenting to get the competing operating system running on Lumia smartphones. Nokia had apparently reached the stage of having manufacturer Foxconn churn out 10,000 of the Android-based devices[10], code-named “Mountain View.”

Suddenly, Nokia’s Android experimentation seems less like a gambit to get rid of those Windows Phone licensing fees (somewhere in the range of $10 per unit), and more like a concerted effort to regain its smartphone market share.

Let’s not forget just how far Nokia has fallen…

In 2007, Nokia smartphones topped 50% of global shipments, but have now sunk below 4%. In early 2011 — when Nokia ditched its own Symbian mobile OS and signed on with Windows — its market share was still nearly 25%[11]. While Windows Phone 8 has been on an upswing, it’s possible that had Nokia chosen to go with Android in 2011 it could be sitting at double digits today instead of being ignominiously lumped in with the “Others” category in sales charts.

That’s a position that’s tough to swallow for a company that was the largest seller of mobile devices for 14 years running and watched its stock drop by 90% as competitors like Samsung (SSNLF[12]) rose to a dominant position by hitching themselves to the Android train.

In hindsight, it seems likely that Microsoft’s move to buy Nokia wasn’t destiny. It wasn’t about bringing a Windows Phone champion back into the fold, it wasn’t about getting synergy between the software and hardware teams, and it wasn’t to avoid the expense of developing its own Surface smartphones.

It was to prevent its primary smartphone hardware vendor from jumping ship and either abandoning Windows Phone altogether, or at least offering Android alternatives.

Either outcome would have had a serious effect on Windows Phone 8 smartphone sales and raised doubts about the platform’s future. It’s bad PR if the partner responsible for 80% of your market goes to another operating system. Other hardware partners have been few and far between, and the bad vibes from Nokia ditching wouldn’t have left any of them eager to take up the slack.

It’s unlikely we’ll ever know if Nokia could have recovered any of its past glory if it switched to Android (unless that Microsoft deal comes apart at the last minute).

Personally, I have my doubts. In 2011, Nokia had a shot of carving out a slot. Today, Samsung is solidly entrenched on top of the heap, Chinese manufacturers like ZTE (ZTCOF[13]), Lenovo (LNVGY[14]) and Huawei are covering all the price ranges while expanding their North American presence, and smaller players like Sony (SNE[15]) have filled in many of the premium niches. Nokia has its fans, but breaking into the Android market in a meaningful way from scratch in 2013 — let alone in another year — would be a tough slog.

For Microsoft, though, there was no happy ending to that scenario. Buying Nokia to prevent it from turning to Android was the only course of action to protect the already tenuous Windows Phone 8 market from a collapse.

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

Endnotes:
  1. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  2. a push for apps: http://investorplace.com/2013/03/microsoft-still-struggling-with-app-shortage/
  3. BBRY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BBRY
  4. NOK: http://studio-5.financialcontent.com/investplace/quote?Symbol=NOK
  5. a whopping 80% of that Windows sales volume: http://news.cnet.com/8301-10805_3-57601096-75/nokia-adds-muscle-to-windows-phone-and-microsoft-sure-needs-it/
  6. Microsoft’s $7.2 billion deal: http://www.theverge.com/2013/9/2/4688530/microsoft-buys-nokias-devices-and-services-unit-unites-windows-phone
  7. Ballmer succession plan: http://investorplace.com/2013/08/3-steve-ballmer-microsoft-ceo-replacements/4/
  8. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  9. Nokia had Android running on its Lumia smartphones: http://www.forbes.com/sites/timworstall/2013/09/14/nokia-was-developing-an-android-phone-before-the-microsoft-purchase/
  10. churn out 10,000 of the Android-based devices: http://www.unwiredview.com/2013/09/19/nokia-still-working-on-android-phone-wont-cancel-until-november-foxconn-already-made-10k-prototypes/
  11. its market share was still nearly 25%: http://techcrunch.com/2011/05/20/nokia-sees-lowest-market-share-in-14-years-gartner/
  12. SSNLF: http://studio-5.financialcontent.com/investplace/quote?Symbol=SSNLF
  13. ZTCOF: http://studio-5.financialcontent.com/investplace/quote?Symbol=ZTCOF
  14. LNVGY: http://studio-5.financialcontent.com/investplace/quote?Symbol=LNVGY
  15. SNE: http://studio-5.financialcontent.com/investplace/quote?Symbol=SNE

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