Microsoft gets “MicroPhone” in Nokia Deal

Business in Scandinavia 2011 outside Nokia HQ
Business in Scandinavia 2011 outside Nokia HQ

Today’s announcement that Microsoft is buying the cell phone part of Nokia (their Devices and Services Division) was hardly shocking. Yet, it is a noteworthy event and also a little bit saddening given that it represents a significant milestone in the downhill slide of Nokia from its heights as the undisputed leader in cell phone manufacturing only a few years ago.

With our Chapman MBA travel course Business in Scandinavia, we visited the Nokia headquarters both in 2010 and in 2011. In the following, I will offer some reactions to what this acquisition may mean in the evolution of the mobile phone industry and intersperse it with some pictures from our Nokia visits.

Microsoft’s MicroPhone

The fact that Microsoft acquires a major hardware brand is further validation of Apple’s business model of competing with entire eco-systems. To make the Windows Phone operating system a credible competitor to Apple’s iOS and Google’s Android, Microsoft needs to tightly integrate Windows with Nokia’s still world-class hardware.

Nokia's dots after 2010, an ominous sign?
Nokia’s dots after 2010, an ominous sign?
Nokia HQ interiors
Nokia HQ interiors

The resulting product will apparently still have the Nokia name on it but eventually, Microsoft will likely phase it out to truly make it theirs. Any name ideas for them in the comments? Perhaps the MicroPhone could be confusing to some but I kind of like it! Still, the risk of having “phone” as part of the name may be that it can reinforce the increasingly false notion that people buy smartphones to actually talk to people. Even without “phone” in its name, I believe that the disproportionate focus on making great “phones” as opposed to developing slick interfaces appropriate for apps and social media contributed to the demise of the mobile device units of Nokia and of Sweden’s Ericsson before them.

App Developers’ Faith in a 3rd Eco-system?

Nokia's 2011 Strategy
Nokia’s 2011 Strategy

The hardware/software integration alone will not be sufficient for success, however. Microsoft still has a tall task of convincing busy and under-staffed independent application developers of the long-term viability of a third eco-system. Short-term incentives alone will not cut it if developers fear their Windows Phone development efforts will be wasted in a couple of years. Still, if this acquisition doesn’t signal a serious commitment, I can’t see what would.

Chapman MBAs at Nokia HQ in 2011
Chapman MBAs at Nokia HQ in 2011

Also, if Microsoft has taken a cue from their Seattle neighbor Jeff Bezos of Amazon, they may already be looking seven years down the road and with such a long-term perspective, today’s smartphone market may still be considered to be in an embryonic stage of development, especially for the next billion cell phone users in emerging markets. That is, the battle of the eco-systems may not be over yet. Far from it.

The Outsourcing/Vertical Integration Pendulum Swings Back

Nokia HQ Skylight
Nokia HQ Skylight

Not very long ago, many business school professors, me included, professed the virtues of outsourcing so that companies could focus on their strengths or core competencies. This likely is still valid advice in many situations and certainly is the path chosen by the remaining Nokia having not only begun spinning of their cell phones, but also things like real estate (they are currently leasing their headquarters).

Nokia Strategy Briefing in 2011
Nokia Strategy Briefing in 2011

That being said, Microsoft’s Nokia acquisition is further testament to the increasing complexity of how value is best created in global supply chains. Not only will Microsoft work both on hardware and software, in 2010 they also began rolling out Apple Store look-alike Microsoft retail stores to sell their own wares and complementary products. No wonder they would find it tempting to have some more of their own hardware to put on those tables!

Comments

  1. Rolf says

    Niklas, I do find this notewothy too, and I’d ,like to add some to your analysis.

    – First, and probably most important. In the history of our world, there has never been any long term three part wars. When this has taken place, it has been a question of months or even weeks before alliances has formed and the situation has returned into a more “normal” two part war situation. There is always an attacker and a defender, all other situations are exhausting all involved parties. It is very likely that there will be an alliance in this situation too, and that we now see the end of Nokia as we know it. (Isn’t the situation we have now, where MS takes over a strategic partner an example of this? :-) )

    – The evolution of man to man electronic communication will not stop and persist in the current state. During the last decade, we have seen a transformation of handheld devices, going from encapsulated, segment oriented, fixed content device phones (yes, phones mainly, Nokia’s main competence field) to eco system oriented, flexible user driven content handheld data terminals, an evolution that took place some five years later than I expected in 2002. (I had BenQ and HTC as customers then, and they were planning big changes at that time. But there was no Steve Jobs in place in this market at the time) My belief is that the lock-in effects of the Apple eco system will be their death in a near future in the same way as it is a success factor today. Open standards has always won its wars, not by being best, but by being good enough.

    – The cloud is still in its starting position. Apps, as we know them today; purchasable items in a store, will be dead in a couple of years. Server oriented application architectures will win, not by being technically supreme (which it is), but by being able to provide the content that the users want wnen they ask for it. Today, content is user driven both in terms of demand and to a by the day greater extend in terms of creation. Tomorrows applications, and thus probably to an even greater extent content, will be user driven, simply because the users will learn that it’s possible. This will require new business models, because it will not be possible to charge stuff on a per-unit base anymore.

    We are in the downhill slope of the hype curve of todays eco system standard. MS buy-in into that paradigmus is probably an insurance for just being on the market in seven years instead of being out. I think it’s the right thing to do for them, and possibly for us users. But we shall remember that MS never has made a point of being innovative. They have been implementative, giving people what they want by using presently existing paradigms. My bet is tnat in five years, MS and Google are going to be in friendlyness competing players at the same playground while Apple is struggling for survival again on the othet half of the playground. Steve Jobs is, very sadly, no more.

    • says

      Thanks Rolf for a very thoughtful comment! When it comes to the number of surviving competitive alternatives, I think Microsoft may have taken part of some research of my former colleagues who find empirical support for the viability of three profitable “generalists” in an industry, also known as the “Rule of Three.” Of course, Microsoft may have its aim set higher than place 3 and it will be interesting to follow the closed v open system war as well and you may very well be right in your prediction that Apple is facing some serious challenges on multiple fronts. Still would miss them if that were the case and I am also not holding out my hopes for Microsoft turning into an innovation juggernaut, but we’ll see!

      • Rolf says

        I have a problem in believing that the Rule of Three is valid for markets where people buy a function rather than a specific gadget. The smartphone market is now becoming standardized (Android) and the mobile handset is becoming a commodity. But I may be wrong… hopefully, since I like innovativity.

      • Can Uslay says

        Right on Niklas, actually, in the long run, I would predict #1 Android, #2 Windows, #3 iOS unless Apple can somehow create a 5C low cost phone without significantly cannibalizing the existing base. Blackberry can co-exist as a specialist.

        • says

          Thanks Can for your input, appreciate it and I am also curious about Apple’s September 10 press conference! Once they begin also competing on price, it could be a slippery slope, though. Who knows, perhaps developers would be next in line unwilling to give up a third of the revenues right off the bat in the App Store?

  2. jon_mitchell_jackson says

    It will be interesting to see if Microsoft gets this right. Speaking of “outsourcing” it looks like you and your students– traveling around the globe– are giving this term new meaning. Sharing smart students with great ideas with other cultures and companies around the world is what the term should really mean :-)

    • says

      Yes, still very much a case to follow and on the one hand, it looks very much like an uphill struggle they have in front of them, on the other, we are still in the early days of truly smart and user-friendly phones which likely is a big industry for decades to come so I understand their eagerness to get a piece of the pie. Ok, will keep “sharing” student with the world :)

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