Microsoft’s Purchase Of Nokia In Perspective

Let me caveat this post with a critical admission: I work for Nokia. Readers rightly should interpret everything that follows with the understanding that even if I wanted to, I would be unable to offer objective commentary on the decision by Microsoft to purchase my employer’s Devices and Services business. Still, my mission is to demystify this industry for those who do not live and breathe it, and no other story commanded as much attention as this one did last week. At this moment, I find it difficult to write about any other topic.

I’ve been in business long enough to have witnessed the rise of industries and companies that seemed unshakeable. That is, until they cracked. Nothing illustrates this more perfectly than the video game business.

Fourteen years ago, I joined Hasbro’s interactive unit to help the company market its stable of video games, most of which were designed at that time to run on PCs. Back then, the PC segment was strong, with simulations and strategy titles driving the category.

Yet, within a matter of just a couple of years, consoles, especially Sony’s PlayStation2, came to dominate PCs for gaming. With its decline came the vanishing of once mighty franchises, including several that Hasbro then owned. Falcon, Gunship, X-Com, Railroad Tycoon, and Master of Orion all were, at one point, successful titles that were optimized for PCs and PC gamers. Consoles, however, offered an experience most consumers preferred. They enabled people to play in their family rooms rather than their home offices. They tended to rely more on twitchiness than strategy. Consumers loved it.

Interestingly it was at the PlayStation2’s peak of power when Microsoft, arguably the biggest loser of the PC games business’s decline, released its first-generation Xbox game console. With two dominant incumbents in Sony and Nintendo, and with Japan, which amounted to one-third of the global video game market, practically impenetrable to any American game machine or software, the market questioned why the Xbox should even exist. For several years, it toiled in third place.

Yet Microsoft was committed to the business, and when it released its second-generation console, the Xbox360, it offered a compelling, best-in-class online gaming platform, Xbox Live, and much richer graphics. Sony, on the other hand, was slow to catch onto the connected gaming trend, and it priced its next-gen console, the PlayStation3, higher than Xbox360. For its part, Nintendo launched the Wii, which eschewed the arms race for faster, more realistic graphics that Sony and Microsoft were waging, choosing instead to enable a player’s body movement to control game play. Microsoft had an answer for that, too, in its motion-sensing Kinect device. The result: after getting its clock cleaned in its first foray into consoles, it emerged a winner in the second round.

I offer this as evidence of both Microsoft’s tenacity and the tendency of markets to change, even when dominated by strong incumbents. In the handset business, Apple and Samsung have rung up impressive market share. Together with Google, they have earned their hard-won outcomes, and I respect their businesses and achievements. That being noted, I have read a lot lately about the war of ecosystems having already been won by them or lost by Microsoft and Nokia, and I think there are good reasons to think that such pronouncements are premature. Here, in fact, are eight of them.

  1. History suggests it’s hard to maintain leadership in any category, especially in technology. Nokia, BlackBerry, and Motorola all once dominated handset sales. In the last five years, industry leadership has changed completely. Over the next five, expect more changes. In addition to a deep-pocketed Microsoft, Chinese handset manufacturers are vying for a piece of the action. Meanwhile, Amazon and even Facebook have been rumored to be working on phones of their own.
  2. Apple has a leadership dilemma (and I’m not talking about Tim Cook). This column has noted previously that Apple will have a powerful incentive not to dramatically alter its iOS mobile operating system. That’s because certain changes, and it doesn’t take many, can cause apps not to work any more. Apple’s quandary, therefore, is choosing between staying the course and hoping that iOS doesn’t start to feel out-dated, or proactively changing things in a way that forces developers to spend perhaps billions of dollars in total to update their apps.
  3. Google has a Samsung problem. Samsung sells the majority of Android devices, and since Android is open source, it’s conceivable that Samsung could create its own variant of Android that’s unique to its phones, just as Amazon has done with Android for Kindle. Given Amazon’s small market share for tablets, which according to this story has halved since 2012 to just over 10 percent, that’s not a pressing problem for Google. It could be very problematic if Samsung follows Amazon’s lead, however.
  4. Google’s Android has a growing fragmentation issue. One of the most common concerns developers voiced about Nokia’s former smartphone platform, Symbian, was that it had too many variants. Developers call this fragmentation. Imagine it this way (these numbers are for illustration purposes only): rather than one segment of one hundred million Symbian phones that developers could reach with their apps, there actually were 20 segments of five million phones each, with every segment requiring some rework by developers in order to ensure that their apps would run. Android also is fragmented, as Google’s own dashboards show. As long as each fragmented Android segment remains large enough and the cost of serving them small enough, many developers will tolerate it. I do not take it as a given, though, that Google can maintain this balance forever.
  5. Google’s incentives are not well aligned with device OEMs. Unlike Apple, which relies on its ecosystem of apps and content to help keep device prices high, Google makes its money from Android almost exclusively by selling paid search to advertisers. The more devices running Android, the more attractive the platform will be to advertisers. That means Google would prefer cheaper handsets, the better the lower the price. That’s not consistent with what matters to phone manufacturers.
  6. Microsoft and Nokia make competitive products. Windows Phone 8 is a different type of OS, no doubt, but customers who try it usually end up liking it. Top apps are there, and more are coming every day. Meanwhile, Nokia offers exclusive apps no one else has, including ones from brands such as ESPN, Weather Channel, CNN, and Red Bull. Nokia’s HERE maps and imaging capabilities are surpassed by no one.
  7. In spite of massive market volatility, governments feel compelled to intervene. It’s now hard to believe that less than 20 years ago, governments across the world worried that Microsoft’s operating system and browser lead was so dominant that anti-trust measures were the only thing preventing a full-blown monopoly. Like most of the rest of us, these governments missed the rise of mobile devices, social media platforms, cloud-based computing, and open source software, all of which significantly changed the market these governments were trying to protect. Despite this recent history, I wouldn’t be surprised to see governments take shots at mobile incumbents on issues of privacy, in addition to their ongoing intervention on patent issues.
  8. The battle for the home and car in the war of ecosystems hasn’t really started yet. As big as the market for the pocket and purse is, the battle for the home and the car could be even bigger, as tech companies figure out how to connect our appliances, home entertainment systems, and vehicles to the Internet. These markets represent wide open opportunities for Microsoft, Apple, Google, and companies we may not even know yet.

As a Nokia employee, I want Microsoft to win. I believe Microsoft can win. Regardless of how I see it, though, I hope I’ve persuaded you why today’s market leaders are guaranteed nothing in the years ahead. In other words, I hope I’ve shown you how the big guys today might lose tomorrow.

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3 comments

  1. Matt,
    we can all see how much you want to succeed with the choices your company and MSFT have made, and that passion is addictive. I used to work for Nokia and certainly continue to root for my old colleagues. That being said, the points you’re making look nowadays to me — the outsider — as Blackberry’s similar comments look to you. You probably know what I mean: a lot of wishful thinking and a bit of desparation.

    Since you invoke historical parallels, I’ll do so, too: OS/2 and WebOS. Both — especially OS/2 — were fully backed by the deepest pockets in the business, preeminent brands and global distribution network. Both had genuine innovation in them. Yet, both failed because the wars of ecosystems had been lost, but neither OEM (IBM and HP) wanted to acknowledge it. Or remember IBM’s PS/2 HW ecosystem? I had one of those back in the day. You think just by waiting MSFT’s chances get better? They’ve been playing this since the Windows Mobile days, and time has not been on their side so far.

    However, if there’s somebody who’s side the gods of consumer preference are on, it’s innovation. I wish there was true, compelling innovation in WP, but truth to be told, it’s just a little different. Not much. It is very hard to make a compelling case why consumer _must_ choose that (I used WP two years), but much easier to make that case for iOS and Android (all your long-tail apps, cloud, connector ecosystem..). Until that changes, Microsoft can only pump money to it and hope it gets the pieces together some day.

    Money buys you wondrous things, like the exclusive apps you mentioned. It can buy you time, but eventually all executives will close units that are not making it and don’t have a turnaround plan. Attempt 1 was WM, attempt 2 was WP licensing and attempt 3 is now this vertical integration (own phone). Will there be attempt 4 if this fails?

    This being said, I hope I’m proven wrong and MSFT/you can make this work. When you have all the long tail apps and WP’s Bluetooth finally works with my Infiniti, count me back in.

    Actually, this last sentence is a counterpoint to your point about cars. I unfortunately believe the car connectivity market will simply mirror the smartphone market, bringing its winners to the helm when defining the car connectivity standards and compatibility. That market is not open, it is a derivative of the smartphone market. That’s why mothership Nokia kept HERE — to be fully able to follow the money to Android and iPhone markets and ensure those experiences in cars will be top notch.

    The only two places where I think MSFT has any advantage is home (xbox as beachhead) and enterprise (their business ecosystem: VARs, SIs, legacy systems.. all geared towards MSFT). I hope some unique innovation will come out from those positions of strength.

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    1. Thanks for reading and for your thoughtful comments, HH. Perhaps on another day and in another post, I’ll reflect on the strategy that emerges from the acquisition. That was not my focus this time, though; my goal was to issue a cautionary note for those who would otherwise be inclined to call the race, an impulse that I believe is premature.

      I encourage you to listen to this 13 min. talk on the connected car (link below). It illuminates how distinct the automotive business is. For example, as the speaker notes, most of today’s vehicles were in development prior to the release of the first iPhone. He urges a seamlessness that today is largely absent but will be necessary to accommodate users of all devices: http://us.telematicsupdate.com/fc_tele_evupdatelz/lz.aspx?p1=05972643S9392&CC=&p=1&cID=0&cValue=1.

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  2. […] Microsoft’s Purchase Of Nokia In Perspective […]

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