Today’s announcement signals the end of an era, not just for Nokia, but also for Microsoft. Both companies have now embraced different strategies to be able to better compete in a completely different landscape where mobility is the driver. While Microsoft realised that it wouldn’t be possible to succeed without controlling the entire value chain, Nokia has realised that it needed a stronger ally with the financial muscle to continue driving its Lumia smartphones.
The market has moved from a product to an ecosystem battlefield. In this new world, phone makers need to excel in the hardware and design, but more importantly they need to excel in the user experience, as well as services and content offering, which is extremely cash demanding.
Moreover, as smartphone penetration continues to grow, manufacturers will only be able to increase their sales by attracting users from competitors, which requires huge investments. Nokia realised it didn’t have the financial resources to become the third alternative to Apple and Samsung in the smartphone segment. Instead of waiting to see whether that would change and eventually risk running out of cash, it decided to sell itself to the only company really keen to invest in Windows Phone.
Despite the partnership between Nokia and Microsoft on the operating system side, it was clear that both companies were moving at different speeds. Since the agreement was closed in 2011, Nokia has been able to launch several Windows Phone devices quickly, addressing the lower price points the market needed and launching services across the range of devices to differentiate from other players.
On the other hand, the development of the operating system has been slow and far behind other operating systems. The Windows Phone OS hasn’t been able to attract the same number of developers and consequently it failed to attract users, who preferred other platforms due to the availability of more apps, more features, and more devices. Microsoft was relying on Nokia to make Windows Phone successful and Nokia was relying on Microsoft to grow the ecosystem. Now it is time for Microsoft to take onboard its own destiny.
The tiny Windows Phone success has been driven by Nokia’s strong product development capabilities and the “blind” support from operators expecting to see much stronger support from Microsoft so they could have an alternative to Android and iOS. Therefore today’s agreement will be well received by mobile operators as Microsoft will align the software and hardware development, speeding up the Windows Phone operating system, but more importantly it will give operators access to Microsoft’s deep pockets, which it will use to promote Windows Phones.
We will probably see more agreements like this one in the future. The time for pure-play vendors has ended and the remaining ones haven’t understood that yet. The market will become more concentrated as economies of scale are important to survive in a market where profits will come from several slices of a pie rather than one single business, particularly if that business is hardware.
Mobile phone vendors will realise that the only chance to succeed is by merging with content providers, with bigger manufacturers, or less likely with an operator or a large retail chain. Whatever form it takes, concentration is key to survive as margins will continue to be squeezed by the dominant players. While Nokia has realised that and is taking action, others will continue to see their financial situation deteriorate and will take the same decision when bankruptcy is a reality.
Although Microsoft is buying the entire Nokia Devices unit, it is still unknown what the company will do with this segment. Feature phones continue to represent a significant percentage of worldwide shipments, but that will drastically change in the next few years. In the long term there is a small market opportunity in the segment, but in the short term it is important that Microsoft keeps the segment alive and profitable.
This will give it access to markets where feature phones are still the dominant segment and where the Nokia’s brand is still strong. These markets will see an explosion in smartphones in the next few years and users will likely replace their basic phones with a smartphone from a make they already know and trust. Attracting this first wave of smartphone adopters is crucial for Microsoft’s growth in these regions.