Microsoft has the task ahead to transform struggling Nokia
With its purchase of Nokia's phone business, Microsoft is taking inspiration from Apple's way of making products, bringing hardware and software under a single roof where they can be more elegantly woven together.
But Microsoft already bears a striking resemblance to Apple — Apple of two decades ago, that is, not the trailblazer of the mobile era.
This week's $US7.2 billion Nokia deal is unlikely to change that and catapult Microsoft up the ranks in the smartphone market. That is because Microsoft, with its Windows Phone operating system, is stuck in third place in that market, where all oxygen has been drained by more established players.
Apple and Google have won the hearts and minds of developers who design the apps that lure consumers to their devices, while Samsung is the dominant maker of mobile phones, most of which run Google's Android operating system. Microsoft's and Nokia's products have won praise for their quality, but they have arrived late.
"What matters is not the phone per se but a dynamic app and services ecosystem," says Brad Silverberg, a former Microsoft executive who is now a venture capitalist in the Seattle area.
Microsoft's predicament is a flashback to the situation Apple found itself during the early 1990s. At that time Apple arguably had a superior computer product, the Macintosh, but it languished as PCs running Microsoft's Windows operating system engulfed most of the market. One problem for Apple then was that Microsoft had succeeded in gaining the allegiance of software developers, who produced a bounty of applications.
"They're stuck in the same vicious cycle that Apple was in 20 years ago," says Benedict Evans, an analyst with Enders Analysis, a research firm, and a former strategist in the wireless industry.
The challenges for the marriage of Nokia and Microsoft go far beyond support from developers. Microsoft is in the midst of the biggest organisational changes in its 38-year history. In mid-July Steven Ballmer, its chief executive, unveiled a plan to restructure the company's often clashing fiefdoms into business groups intended to co-operate more.
Ballmer (pictured) then stunned the tech industry by announcing plans to retire from Microsoft within 12 months. He said he was leaving earlier than planned because he felt the company needed a leader prepared to stay longer. That fuelled speculation he had been encouraged to leave by his board.
Blending a major acquisition into a company is challenging enough, but doing so with the unexpected management change at Microsoft could make it even harder.
"The issue I wonder about is the amount of complexity Microsoft is taking on its business by absorbing Nokia, at the same time it is reorganising, at the same time Windows 8 is faltering," says Michael Mace, formerly at Palm and Apple.
While Ballmer plans to leave Microsoft after a successor is found, he was very much involved in cutting the Nokia deal.
Microsoft is under enormous pressure to reinvent itself for a world in which mobile devices are the animating force in technology, rather than personal computers. Sales of PCs are suffering the most prolonged decline in their history. Two powerful pistons of Microsoft's business — Windows and the Office suite of applications — are tied to the health of the PC market.
The deal for Nokia plunges Microsoft deeper into hardware than ever before. It is a business with enormous complexities — managing sprawling overseas supply chains, for one — that are not as prevalent in the software business. While it has had success in hardware through its Xbox video game console, Microsoft has also badly stubbed its toe in this area. It recently took a $US900 million charge stemming from slow-moving sales of Surface, a tablet it created to compete with the iPad.
Unlike some companies, like BlackBerry, that have missed technology shifts, Microsoft still has vast financial resources that give room to develop a mobile strategy that produces results. Because of the huge profits it makes from its flagship software business, "Microsoft has choices most companies don't", says Bill Whyman, an analyst at ISI Group.
Nokia remains the second-biggest maker of mobile phones in the world, when inexpensive feature phones are considered as part of the calculation. The company has footholds in large emerging markets such as India that could eventually move to smartphones.
Microsoft and Nokia became partners over two years ago, when Nokia agreed to standardise its smartphones on Microsoft's mobile operating system. Ballmer says Microsoft and Nokia have "done incredibly well in the last couple of years" in the mobile market and that the Windows Phone operating system has emerged as a "clear No. 3" in smartphones.
But No. 3 is a long long way from No. 1 in this arena. Microsoft's software ran on 3.7 per cent of the smartphones shipped during the second quarter, compared with 13.2 per cent for Apple and a whopping 79.3 per cent for Android, according to IDC.
Microsoft has argued that the selection of apps available for its phones is improving all the time. There are still big developers that have not produced software for Windows Phone, like Facebook's Instagram, but far fewer than there used to be.
One unsettling possibility for Microsoft in mobile is what has occurred in the internet search market, where the company's Bing search engine lags far behind market leader Google. Microsoft says Bing search results are equivalent or better than Google, but affinity for the Google brand is strong.
Will a similar perception dooms Microsoft's mobile phones to the margins of the industry?