Microsoft’s Nokia purchase will change the technology landscape and its own future

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Stephen Elop

Microsoft has announced that it intends to buy Nokia’s devices and services business for €5.4-billion. In one fell swoop Microsoft has reshaped the technology landscape and its own business for the foreseeable future.

Steve Ballmer recently announced the reorganisation of Microsoft to focus on devices and services. That focus had a deep flaw and analysts were quick to point out that Microsoft had no real depth or expertise in supply chain management and distribution. This made its problems in the hardware side of the business, with Zune, the abortive Kin mobile phones, and far more significantly the Surface tablet billion dollar failure, unsurprising.

Microsoft has changed all that by buying Nokia’s phone business, including a non-exclusive license to Nokia’s patent portfolio for 10 years. Nokia’s partnership with Microsoft under CEO Stephen Elop stabilised the business, which until 2010 had dominated the mobile device landscape. And while Nokia has shown some signs of platform growth in the past few quarters, it was never going to be enough. The Apple and Android juggernauts were steaming ahead and even the once mighty Nokia had to accept that it had become a small player in the industry it essentially created.

Despite the recent hard times, Nokia still has massive strength in the devices and related services market. With over 33 000 employees globally, Nokia has deep manufacturing, supply chain, distribution, and support infrastructure, and this capability is distributed across the globe, something Microsoft simply just does not have.

In addition, Microsoft acquires the massive depth of relationships and history Nokia has with mobile network operators (MNOs) across the globe. MNOs may just be the most powerful players in the new connected technology landscape. In the same way the fixed line telecoms companies of the last century facilitated the technological revolution based on communication, MNOs and the services they offer will be the web that ties the future together, especially in largely unconnected continents such as Africa.

It would have taken Microsoft far too long to forge these relationships and Microsoft would have had massive channel conflict with its partners in this regard. The pending purchase of Nokia achieves this with immediate effect. The win for Nokia is that it divests itself of the loss making device manufacturing and distribution arm of its business, and can focus on the profit-making services and infrastructure industry. Microsoft wins by immediately becoming a player in the devices and services industry with far greater integration and synergies than the old Nokia/Microsoft partnership offered.

What it means for the mobile landscape:

The acquisition not only revolutionises Microsoft’s business, but the effect on the mobile industry is equally ground breaking. This transaction marks a fundamental shift in the technology landscape making it even harder for the smaller niche players in the mobile and connected technology landscape. The arena will be dominated by the three heavy weights Apple, Google and now Microsoft. Microsoft current market share is still in the single digits for mobile devices, but expect that to change fast in the next two years. It’s entirely plausible that Microsoft will come to take at least 25% of global market share for its platform as it ramps up its mobile business on the foundation acquired from Nokia.

The landscape will now reshape itself dramatically. Apple is about to unleash its next iteration of the game-changing iPhone, along with new tablets and operating systems later this year. Google has also firmly entered the hardware game with Motorola and its Nexus brand.

Now Microsoft, with Nokia, will tackle its rivals with renewed vigour and form global distribution partnerships that will challenge the other two dominant players in the market.

It is also bad news for the other smaller players in the mobile market, specifically HTC and BlackBerry. Mobile is all about the ecosystem around platform and for hardware sheer scale. The new triumvirate of Apple, Google, and Microsoft, now have that scale both in the actual hardware and related services ecosystem.

The smaller players will have to seek partnerships that will give them the support they need to survive. It is highly likely that in this new environment both HTC and Blackberry will have to seek new partners or more likely potential buyers with some urgency. While BlackBerry is investigating acquisition, it would be advisable for HTC to do the same. For both companies’ sake, they’ll need to be acquired by the end of 2014 by global device manufacturers, like a Lenovo, or even one of the big three, in order to bolster their patent portfolio, and device manufacturing capabilities.

How technology will evolve:

The new mobile based technology landscape will soon be vastly different to what we have today. Expect far more integration, with increased interoperability. Applications will run seamlessly across all platforms, and data and services, whilst unique to each brand, will essentially replicate itself in similar ways in order to offer the consumer fairly indistinguishable services. Maps and location along with mail and instant messaging are just a few examples of this convergence of functionality.

Differentiation will remain on the hardware and platform level, with the related services fading into a level of unprecedented commonality. The next few years will bring an explosion of partnerships on the services level along with new form factors driven by the big three platforms.

Microsoft has almost completed its reinvention with the singular purchase of Nokia. There is no doubt plenty of detail to be dealt with, but the future path of technology has just been revealed.

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