Microsoft Plunges Into Mobile War, Google Exits

Sunday 16 February 2014

Microsoft Plunges Into Mobile War, Google Exits

Microsoft Announced in September that it was buying Nokia's struggling handset business and would meld its Windows operating system with the devices, it offered two major reasons for the $7.2 billion deal:- Apple and Google were combining their software and hardware.The deal would ensure the survival of Microsoft's Windows operating system in a mobile universe.

So much for Microsoft's rationale. Satya Nadella, Microsoft's incoming chief executive, faces some urgent questions: Does the Nokia deal still make sense? And how does Microsoft expect to survive, let alone prosper, in a cutthroat hardware market where Google is giving up?The basic problem for Microsoft is that most consumers have chosen an operating system.

Then, there is Apple, which has succeeded in wringing high margins from its handset business. While Google may have given up, those margins are an attractive target for any competitor. Carlo Besenius, chief executive of the independent research firm Creative Global Investments and a persistent skeptic when it comes to Apple, said Apple was especially vulnerable in price-sensitive emerging markets.

Microsoft's strategy "is much more suited for emerging economies, where there is limited consumer buying power and where smartphones are sold contract-free," Besenius said. "We see Microsoft's mobile strategy clearly to be more successful than Apple's" because "it focuses on the low-end to medium-priced segment." Although starting from a small base, Microsoft has made some progress. According to IDC, Windows Phone was the No. 2 smartphone operating system in nine markets and shipped more units than Apple in 10 markets in 2013.

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Although Nokia hasn't formally announced that it will embrace Android for a line of entry-level handsets aimed at emerging markets, and Microsoft may well reverse that decision once it completes the acquisition, even that strategy may not be as crazy as it sounds. Microsoft would presumably be using a version of Android that places its own apps on top of the operating system, much as Amazon has done with its Kindle.

"Placing Windows services on top of Android for low-end devices is as sensible as doing so for smart devices," said Horace Dediu, who worked at Nokia and is the founder of the consulting firm Asymco. "Android without Google is just commodity plumbing."

Then, if Microsoft can get entry-level customers to use its apps and services (like its Bing search engine and maps), they'll eventually move up to Windows smartphones. At least, that's the theory.

"Microsoft has to learn to operate in a more heterogeneous operating system world," said Materne of Evercore, who has an overweight rating on Microsoft. "I think the new chief executive understands that. It's the apps on top of the device that really matter. The margins on the devices aren't going to be what moves the needle for Microsoft."

Whatever the outcome for Microsoft, some analysts predict that today's handset wars may someday be irrelevant. "Consumer wearables are going to make mobile phones and tablets obsolete and will dominate the entire personal communications market," Besenius predicted.

One reason Google abandoned handsets may have been to focus on the growing but still nascent field of wearable technology, including Google Glass and other products. There's avid speculation that Apple, Samsung and Microsoft are all working on smart wristwatches (Microsoft made a failed effort 10 years ago) and other wearable products.

So Nokia Is a Part Of The Company It is not Selling To Microsoft.