The Long War: What's At Stake for Microsoft in Smartphones
Google's already won. Why bother?
That is the point of view expressed by many strategists who believe Microsoft is wasting time and resources on a battle for market share and profitability it can never win.
Google's Android, in partnership - so far - with Samsung, dominates globally. Apple owns the upper end of the market as well as the income and stock price that go with it.
So, the question goes, why would Microsoft throw good money after bad in a vain attempt to stay relevant, more out of pride than possibility?
The answer, as the following article explains, may be, that it is fighting an entirely different war. And smartphones are but one front. This really is about sustainability, in the sense that the health of technological ecosystems will determine the survival of the species. Yes, the outcome is in doubt. JL
James Stewart comments in the New York Times:
Microsoft is in a different war — one that isn’t over handsets or even the
operating systems embedded in them, but the ecosystem of applications and
services that sit on top of them
When 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 already combining their software and hardware.
■
The deal would ensure the survival of Microsoft’s Windows operating system in a
mobile universe.
That was then. Last month, Google threw in the
towel on its foray into handsets, selling its Motorola Mobility division to
Lenovo of China for $2.91 billion.
And this week, The Wall Street Journal reported
that Nokia would offer a version of Android, Google’s operating system, on a
line of smartphones aimed at emerging markets.
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 already chosen an operating system.
Changed Landscape
Every smartphone operating system has lost ground to
Google’s, which has all but completely replaced Symbian, once widely used by
makers like Ericsson, Motorola and Nokia.
Smartphone operating
system share of sales
100
%
Others
Symbian
80
iOS
(Apple)
60
BlackBerry
40
Android
(Google)
20
Microsoft
’08
’09
’10
’11
’12
’13
“Google has won,” said Nicholas Economides, an
economics professor at the Stern School of Business of New York University, and
currently a visiting professor at the University of California, Berkeley who
specializes in network economics and electronic commerce. “We’re in a world
where the biggest market share by far is Android. And the second-biggest is
Apple. Then, way behind, is Microsoft. What’s in this game for Microsoft?”
From Microsoft’s perspective, the answer may
be that it is in a different war — one that isn’t over handsets or even the
operating systems embedded in them, but the ecosystem of applications and
services that sit on top of them. And if that’s the case, Microsoft had little
choice but to double down on Nokia and its handsets, since the alternative would
be worse.
In an email to Microsoft employees on Feb. 4,
his first day as chief executive, Mr. Nadella said, “Our job is to ensure that
Microsoft thrives in a mobile and cloud-first world.”
It’s hard to imagine how Microsoft could be
“mobile and cloud-first” without mobile.
Microsoft’s “objective is to get to the point
where Windows phones would be able to use Microsoft software and applications
for PCs and tablets,” Professor Economides said. “If they can get there, that
would be a huge win. They could leverage all their applications and be a
formidable competitor. But they’re not there. Saying that’s the objective
doesn’t mean it will happen.”
Kirk Materne, an analyst at Evercore Partners
who covers Microsoft, agreed that the company had little choice. “It was a
fairly low-risk way for Microsoft to dip its toe into the market and try to
extend Windows’ relevance,” he said. “It’s not going to be pretty. They’re
already running uphill. But investors have very low expectations. If Microsoft
can regain any momentum, it’s all upside for them.”
With $83 billion in cash on its balance sheet,
Microsoft’s investment in Nokia is relatively modest.
Still, for Microsoft or Lenovo or any other
hardware maker trying to grab market share, the trends are ominous: In a global
market once dominated by Nokia and BlackBerry, both are struggling for survival.
Nokia’s market
share in 2013 dropped 25 percent, to 13.8 percent, and BlackBerry’s was just
1.9 percent, according to the research firm IDC.
So far, the marriage of the Microsoft Windows
operating system with Nokia’s handsets under the Lumia brand has done little to
upend the global smartphone market. Although Lumia’s fourth-quarter sales
doubled to 8.2 million from the year earlier, they still represented a drop from
the previous quarter. And Lumia fell even further behind Samsung, which
sold 10 times as many that quarter (86 million), and Apple (51 million). It
was also behind both Huawei (16.6 million) and Lenovo (13.6 million).
In its last earnings report as a handset
manufacturer, Nokia said last month that the handset division it was selling to
Microsoft lost 201 million euros in the fourth quarter and sales fell 29
percent. Microsoft has said it needs to sell 50 million Lumia units a year to
break even, and it is nowhere near that yet.
Google seems to have made only a halfhearted
effort in its foray into handsets, but its numbers were also grim. Under Google,
Motorola had operating losses of $1.1 billion in 2012 and $645 million for the
first nine months of 2013.
But analysts I interviewed said Microsoft may
not have the luxury that Google did of abandoning a money-losing handset
operation. “Microsoft doesn’t have the same hand to play as Google,” said Ken
Sena, the Evercore analyst who covers Google. Unlike Microsoft, Google does not
have to worry about its ecosystem since Android is the largest handset operating
system by far. Android ensures access for Google’s search engine, which is where
Google earns the bulk of its profit. Selling Motorola to Lenovo will strengthen
a growing competitor to Samsung, even as it gets Google out of a business that
put it in the awkward position of competing with some of its largest
customers.
Without Nokia’s commitment to Windows,
Microsoft was in danger of extinction on handsets. And Microsoft does not really
have to worry about competing with partners who use Windows in their handsets,
since there are so few.
And at least, the deal buys Microsoft some
time. “Microsoft needs to see how Windows works on a handset,” Professor
Economides said. “Having a division that does it for you is very useful.
Otherwise you have to beg or persuade Samsung or someone else to make a Windows
device. But Samsung already sells millions of Android phones, and it doesn’t
care about Windows.” (Samsung does offer Windows on some phones and
computers.)
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 that 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,” Mr. 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.
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 Mr. 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 some day be irrelevant. “Consumer
wearables are going to make mobile phones and tablets obsolete, and will
dominate the entire personal communications market,” Mr. 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 as-yet-undisclosed 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 is Nokia — a part of the company it isn’t
selling to Microsoft.
As a Partner and Co-Founder of Predictiv and PredictivAsia, Jon specializes in management performance and organizational effectiveness for both domestic and international clients. He is an editor and author whose works include Invisible Advantage: How Intangilbles are Driving Business Performance. Learn more...
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