Microsoft makes big move into mobile

It’s the piece — a way into the mobile phone market — that Microsoft is missing – and is willing to pay $7 billion to obtain. Rivals Google and Apple own the space, and the media coverage was extensive.

Here’s the Wall Street Journal overnight story about Microsoft’s purchase of Nokia:

Microsoft Corp. struck a $7 billion bargain with Nokia Corp. to bolster a mobile future for the software giant. But the odds are long that a deal can reverse the fortunes of two laggards in a cutthroat market.

Microsoft is wagering a purchase of Nokia’s phone business will help the companies crack a problem they couldn’t as partners: attain the dominant smartphone positions of Apple Inc. and Google Inc.

After nearly three years of working with Nokia, Microsoft is a distant No. 3 in smartphones world-wide, with its mobile software accounting for about 4% of the market compared with a combined 90% share for Apple and Google software. Nokia’s smartphones make up a negligible share after commanding nearly half of the market before Apple’s iPhone arrived.

For Microsoft to make any headway, it must now create mobile devices that attract both consumers and business buyers, find its footing in hardware manufacturing and win over skeptical shareholders and app developers, all the while successfully integrating 32,000 Nokia employees with Microsoft’s 100,000.

Microsoft investors didn’t exactly show their faith on Tuesday, sending the company’s shares down 4.6% to $31.88. The decline erased the stock bump that came after Chief Executive Steve Ballmer recently announced his retirement.

The New York Times story was even more blunt, saying Microsoft had much ground to make up before being considered a player in the market:

But Microsoft already bears a striking resemblance to Apple — the Apple of two decades ago, not the trailblazer of the mobile era. The $7.2 billion Nokia deal, which was reached late Monday, 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 the 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. Even though Microsoft’s and Nokia’s products have won praise for their quality, they have arrived late.

“What matters is not the phone per se but a dynamic app and services ecosystem,” said Brad Silverberg, a former senior Microsoft executive who is now a venture capitalist in the Seattle area.

Microsoft’s predicament is a flashback to the situation Apple found itself in 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 of the biggest problems for Apple then was that Microsoft had succeeded in gaining the allegiance of software developers, who produced a bounty of applications.

The lead quote in the Bloomberg story laid out the challenges of being third in the space:

Microsoft is deepening a push into hardware as dwindling computer sales sap demand for the programs that made it the world’s largest software maker. Nokia shares jumped as much as 48 percent in Helsinki as the sale removes a money-losing handset business and lets it focus on higher-margin networking gear. Even combined, the companies have less than 4 percent of the smartphone market, leaving them far behind Apple and Google.

“The question is whether combining two weak companies will get you a strong new competitor — it’s doubtful,” said Paul Budde, a telecommunications consultant in Sydney. “Both Nokia and Microsoft really missed the boat in terms of smartphones, and it is extremely difficult to claw your way back from that.”

Nokia, based in Espoo, Finland, racked up losses of more than 5 billion euros over nine quarters as Elop’s comeback efforts failed to eat into the dominance of Apple (AAPL) and Google’s Android platform in the smartphone market. The stock has lost more than 80 percent in the five years through yesterday.

The Reuters story offered a good global context about the deal:

In Finland, politicians and business leaders mourned the fall of Nokia, while pensioners wondered what it all meant for them. In Seattle, the chatter centered on what the deal might say about the race to succeed Microsoft Chief Executive Steve Ballmer, who announced 10 days ago that he would step down within a year.

For the global telecom industry, meanwhile, the deal signals further consolidation, coming just a day after Verizon announced a $130 billion deal to buy Vodafone’s stake in its wireless unit. It could also help Microsoft achieve its long-held ambition of becoming a major rival to Apple and Samsung in the global smartphone business, though it will also put even more pressure on the company to show that its massive investments in consumer devices make sense.

The Nokia deal “unequivocally suggests they aren’t exiting the business and in fact are doubling down on mobile,” said Todd Lowenstein, a portfolio manager at HighMark Capital Management, which holds Microsoft shares.

“They can in all likelihood carve out a decent niche with their scale as a fully integrated player, however investors are questioning the merits,” Lowenstein added. “The markets have spoken volumes.” Microsoft shares finished down 4.6 percent on Tuesday.

Nokia and Microsoft have been joined at the hip since early 2011, when the Finnish company agreed to adopt Microsoft’s Windows Phone software for its smartphones – a big gamble for Nokia, but one that came at a time when the company’s market share was already in a freefall and it had few good options.

Since then Nokia has produced a series of Windows-powered phones that were mostly well-reviewed by critics, though largely shunned by customers.

And it’s precisely those consumers Nokia and Microsoft need to win over. And everyone knows that it take a large innovation or shift in behavior to get people to switch technology. I’m sure Microsoft is hoping that the $7 billion investment will eventually pay off, but they have a long way to go before the majority of consumers are clamoring for the latest Windows phone.