It has been obvious for months that Nokia has been in serious trouble, failing to respond effectively to the dual threats to its business. At the high end, Apple and Android have been undermining its high margin smartphone business, capturing significant market share. At the same time, Chinese manufacturers are eating Nokia’s lunch in core low price, high volume markets including China and India. The net result of those threats is that its market share is in freefall, down from a high of 38% to 31% in the last quarter. As market share falls, Nokia’s ability to leverage scale economics, central to its market dominance, is undermined.
Every since Stephen Elop took over Nokia last fall, it was clear that a close tie up with Microsoft was more likely than not in order to try and bring the company back from the brink. Windows Phone 7 may not impact directly Nokia’s volume business, but in providing a viable solution for business users as well as a highly acclaimed consumer proposition, it does give the company credible competitive weapons with which to fight back in those markets.
Microsoft too has a compelling requirement to do this deal. With the introduction of Windows 7, the UI and cross device integration upgrades to the Xbox, and porting of windows onto ARM to support the tablet market, the company has made major advances in the consumer market. However, with no effective mobile offering Microsoft was still devoid of competitive weapons with which to take on Google and Apple.
This is a merger that enhances the future prospects of both companies. Indeed it was the only step that makes sense.
Where does this leave others? Well Apple I am sure will barely raise an eyebrow to this development. The alliance is still two years away from being able to provide a product set that will be competitive to the integrated offerings of iTouch, iPhone, iPad, iMac, and Apple TV. The only issue holding Apple back now is the continued reluctance by content players, and in particular the major studios and broadcasters, to engage with Apple and allow it to offer both standard broadcast and paid TV offerings through iTunes/Apple TV. Ironically, this deal may benefit Apple as there may now emerge a credible competitor to its platform, giving content players at least two viable routes to online customers, hence increasing the chances of the studios doing business with Apple.
For the major OEM’s - Samsung, LG, Sony, et al – the problems have just increased by an order of magnitude. The value of being a “mobile only” or “TV only” provider will continue to diminish. As Apple – and increasingly Microsoft - has shown consumers want content and services available seamlessly across TV, mobile phone, PC and tablet – whatever combination of products they have. To deliver this, all of those devices need to work on a single, homogenous software platform.
The major OEMs are both culturally and structurally unsuited to respond to this fundamental need. Within each organisation, product teams compete to create different types of differentiated – and crucially incompatible – products. Software fragmentation as currently practiced by these players economically will not work. Major structural internal change is required to deliver this level of coherence. Without this they too will face Nokia’s dilemma within the next three years.
As for Google, they are now dependent on one of the major OEMs successfully making that change and choosing Android as the backbone of that strategy. That change needs to come about sooner rather than later as, unlike Microsoft, there will be no interest on Googles part – or more precisely on Google’s shareholders part - in bailing out an OEM on the slide and taking on the margins associated with manufacturing. Google’s strategy of piggybacking on an OEMs manufacturing business to grow an advertising model only works where you have successful and strong OEMs on which to piggyback. I can see this coming horribly unstuck at some point soon.
In the meantime, expect the tie up between Nokia and Microsoft to get ever stronger. Microsoft needs Nokia’s distribution and mobile manufacturing expertise to complete its portfolio of business and home consumer products. Nokia needs not just Microsoft’s OS but also its Xbox customer base, its IPTV products, and its reach into the business community to re-invigorate its offering and be seen as a major competitor to Apple.
In short, the synergies between the two are so strong, that I cannot see the two companies existing as independent entities in three years time.