Can a Nokia-powered Microsoft break the smartphone duopoly?

Microsoft’s acquisition of Nokia’s Devices & Services business for $7.2bn marks a highly significant change of trajectory for the US-based software giant, which will now face industry rivals Apple, Google, and Samsung on more equal terms. It also represents an indicator for the future of the consumer tech industry, and is a symbolic end to the mobile phone industry that we’ve previously known.

Specialism is a risk in the new consumer tech market reality

The sale of Nokia’s mobile phone business conclusively demonstrates the need for major consumer technology vendors to create ever deeper and wider offerings for consumers and ecosystem participants in terms of their device, platform, and service offerings. This approach is no longer simply an option but is a prerequisite for competing successfully in this highly converged market.

Specialists can only ever be bit players in this world where scale, ambition, and a willingness to spend on a grand scale is everything. Moreover, the returns for specialists are often too small to deliver continued prosperity, as Nokia has found and many of its less diversified peers are finding.

In this light, the deal is a good result for Nokia in what has become an increasingly high stakes game. Its DNA, if not necessarily its brand, has a more assured future as part of the Microsoft edifice than it would have had by itself, although that is far from a guarantee of future success.

Microsoft needed to be seen to control its consumer tech future

The deal has many attractions for Microsoft, not least its price. Paying $7.2bn for a company that until recently controlled more than 40 per cent of the mobile phone market is a major coup for the software vendor. Incidentally, this figure is less than the $8.5bn that Microsoft paid for Skype in 2011. While Nokia has lost some of its high-end brand lustre in recent years, it still boasts considerable engineering and design skills and a sizable patent portfolio. Microsoft can potentially benefit enormously from these assets.

Alongside these obvious strengths, Nokia brings considerable market share in key developing markets such as India, where its low-cost feature phones are already helping large numbers of people to get online for the first time. Expect Microsoft to exploit this channel to expand the reach of Bing, Outlook.com, and other online services to the “next five billion” users.

There remains a sense, however, that Microsoft is buying Nokia’s mobile phone business more as an indication that it is serious about going head to head with consumer tech giants Google and Apple than out of strict necessity. After all, Nokia was already heavily committed to Windows Phone.

Undoubtedly, Microsoft CEO Steve Ballmer would prefer to see the benefits of Windows Phone sales directly hitting the company’s own top and bottom lines rather than feeding its licensees. The purchase of Nokia puts it in a stronger position to control its own destiny in mobile devices than it has been before, and certainly puts it in a stronger position than in the PC world, where its OEM partners have greater latitude to dictate terms.

Consumer tech battle of the giants is well and truly joined

Nevertheless, there is still much to resolve if the acquisition is really to have meaningful impact. While Microsoft and Nokia have jointly been increasing their marketing spend on Windows Phone of late, it will take considerable investment to take on Apple and Samsung in terms of marketing and shipment volumes. Microsoft needs to demonstrate that level of commitment before it can really be included in the same league as its two main competitors.

There is also a sense that while Microsoft has many of the key elements of consumer tech market success in place, too many of them aren’t quite at parity with their rivals. Driving usage of its online services in the mobile domain and making Windows Phone a tier-one platform for third parties is a major issue for Microsoft to address.

Windows Phone is an excellent software platform that Ovum has considerable regard for, but its payload of integrated services can feel a little “underpowered” compared with key rivals’ equivalents. And that’s before “missing” applications (specific third-party applications that users find invaluable on their iPhone or Android devices but which are not available on Windows Phone) are taken into account.

Microsoft must leverage its strengths and overcome its weaknesses

Microsoft has some areas of definite advantage over its rivals in the consumer tech market, particularly in gaming (via Xbox), consumer-business crossover services such as VoIP (Skype), and in the ease of integration of Windows Phone with Office 365. Moreover, we shouldn’t forget its huge global installed base of PCs, which are as much a part of the complete picture as smartphones, tablets, and online services.

What is almost certain is that beyond Apple and Google, Microsoft is the best equipped of today’s consumer tech giants to be able to put all the requisite pieces in place to succeed in the long term. However, execution is another matter, and Ovum needs to see sustained progress in Windows Phone shipments over the next three to four years (a market share of 15 per cent is a good target to aim for) to be convinced that Microsoft can establish itself as a real consumer tech market leader rather than a follower.

While the heat may be off for Nokia’s shareholders, the fire is only just being stoked for Microsoft’s investors.

Tony Cripps is a principal analyst in Ovum's devices and platforms division.