Microsoft’s Purchase of Nokia

The speculation that started when Microsoft executive Stephen Elop resigned from Microsoft to become Nokia’s CEO have finally come to an end with the seemingly inevitable announcement that Microsoft is buying Nokia—or at least its devices and services unit. The less well-known, more profitable side of Nokia will remain an independent company. So how did these two companies get to this point, and more importantly, what (if anything) does it mean for the future of the mobile phone industry?

Before the iPhone came out in 2007, there were three notable smartphone platforms. BlackBerry was dominant in the US and Canada, but for pretty much everyone else in the world, “smartphone” meant a Nokia phone running one of the more advanced versions of its Symbian operating system. While these first two were vertically-integrated platforms developed by the hardware manufacturers, the third platform was Microsoft’s periodically-renamed mobile platform that it licensed out to a variety of builders, just as it did with desktop Windows.

Microsoft Mobile History

Microsoft’s myriad forays into the mobile world largely started in the 1990s with Windows CE—based on Windows 95—and developed for PDAs. In 2000, it became Pocket PC, however this was still only for PDAs. Pocket PC 2002 brought the platform to smartphones for the first time, and the name evolved shortly thereafter with Windows Mobile 2003. The name (and basic code) remained all the way through 2010 with a final release of Windows Mobile 6.5.

Windows Mobile was modestly successful in an era where smartphones were still a niche and most people used feature phones. At the Mobile World Conference in 2009, Microsoft revealed two interesting facts: The first was that HTC, which at the time was still a fairly obscure brand in the West, was responsible for 80% of all Windows Mobile sales. The other fact was that total Windows Mobile sales over the years had reached 50 million. By this point, however, it was clear to everyone that Microsoft had a lot of work to do if it wanted to compete with the radically more sophisticated iPhone. Microsoft finally released a completely reworked, modern and thoroughly original successor with Windows Phone 7 in the Fall of 2010. But was it too little too late?

Nokia’s Recent History

In 2010 Nokia still had significant sales, but the trajectory was firmly in the wrong direction. Needing a new direction, they hired Stephen Elop as their new CEO. His bold (foolhardy?) plan involved was described in a brutally honest “Burning Platform” memo to employees, wherein he announced his intentions to completely phase out Symbian and replace it with Windows Phone. The public knowledge of the company’s planned abandonment of their platform, unfortunately, accelerated their market share losses at a much faster rate than the anemic growth of new Windows Phone models could compensate for, a situation known as the Osborne effect.

The Union

While Microsoft ostensibly licenses out Windows Phone to multiple manufacturers (just like it licenses desktop Windows), the truth is that Nokia was the only company shipping any notable volume of Windows Phone devices. According to some recent statistics by an advertising company, Nokia accounts for 87% of the installed base of phones running Windows Phone 8 (HTC is in second place with 10%). Microsoft got almost all of the benefits of vertical integration, with a company building nothing but Windows Phone smartphones, but without actually having to spend the money to buy the company. But while the smartphone market was booming, Nokia drifted inexorably towards complete irrelevancy. There is limited publicly-available data, but it seems likely at this point that Nokia was approaching a shortage of cash, as evidenced by the immediate 1.5 billion euro line of credit Microsoft has made available to Nokia. If Nokia were not desperate for money, they would have no need for a loan. Nokia’s choices were down to either a Hail Mary switch to Android, bankruptcy, or a sale of the company. For Microsoft, these first two Nokia options would have the effect of immediately killing Windows Phone. There simply isn’t anybody else making enough to justify the existence of the platform. And so for Microsoft, the only options were to either abandon Windows Phone, and completely cede the phone market to its rivals, or buy Nokia’s phone business, under whatever terms they were offering.

The Future

So what does this mean for the future of the mobile industry? Windows Phone is, globally, still in the low single digits, but it’s slowly starting to make real progress in Europe, and a select few other countries. Will it be enough? I think it’s a non-starter in most of Asia, but I think it actually stands a chance of surviving as a viable, if distant, third option in the West. It’s highly differentiated from both iOS and Android, and I think it can do respectable business as the (in a complete reversal for Microsoft from the 1990s) counter-cultural, semi-rebellious choice. The phone market is huge, and certainly large enough to support three ecosystems. With a pie this big, even a small slice is enough.