On September 2, Microsoft announced that it would pay $7.2 billion for Nokia's handset business, including its smartphones and Asha phones aimed at consumers in developing economies. Key personnel from that business, including Nokia's former CEO Stephen Elop, would be joining Microsoft, and Nokia would now be a company that focused on location technologies (via its Here services) and wireless infrastructure (via NSN, for which it had purchased Siemens' share).
The move marked the exit of one of the most storied and, for many years, most successful mobile phone companies in history. It also marked Microsoft's entry into the handset market proper, taking an approach more aligned with Apple's than Google's. It's not only that it's the first time Microsoft has acquired a licensee, but it's also that it acquired one that had a dominant share of its licensing business in a device category.
Nokia shocked the world when it announced that it would embrace Windows Phone as its strategic smartphone operating system, going so far as to note that there would be "no Plan B" should the initiative fail. (As TUAW lead blogger Michael Rose tweeted, "Plan 'B' ultimately stood for 'Buyout.'") Nokia's decision came down to four main justifications. It would be exceedingly difficult for Nokia to build an Android and iOS rival with MeeGo (true, as was demonstrated by webOS and BlackBerry 10). Google would not offer a way to include Nokia's location assets into Android (true since they were largely redundant or competitive). Microsoft would offer financial support to Nokia (which it did). And, finally, Android was the path to commoditization (possibly true given the consolidation we've seen around Samsung in that market, but not necessarily solved by Windows Phone or any other licensed OS).
Microsoft was willing to take locations and give loot, but needed something in return: exclusivity.
Microsoft was willing to take locations and give loot, but needed something in return: exclusivity. Windows Phone was struggling in part because manufacturers were largely repurposing older Android platforms for it. (Although, in fairness to Samsung and HTC, Windows Phone's limited hardware support made using the latest and greatest components difficult.) Nokia invigorated Windows Phone with features such as colorful and solid polycarbonate shells that resisted showing scratches, Qi wireless charging, free (and ad-free) cached personalized internet radio, displays that avoided washing out in the sun, optical image stabilization and, ultimately, the best camera ever shipped in a modern smartphone with the Lumia 1020. Impressively, it did all this while staying true to its pledge not to toy with the consistency of Windows Phone's user experience across devices for the good of the ecosystem.
These advances, tied with hard work in the US carrier channel, helped nudge Windows Phone's share up a bit, although some of those gains may have come from the cool reception to new BlackBerry handsets as well as at the expense of other Windows Phones. Indeed, HTC bore the brunt of embarrassment as the multicolored Lumia 820 and 920 stole the thunder from its similarly brightly hued Windows Phone 8x and 8s.
When the smoke cleared, the mobile phone landscape had changed a bit. The Windows Phone landscape, though, had changed dramatically, with Nokia capturing more than 80 percent of Windows Phone sales from a struggling HTC and uninterested Samsung. Along the way, it had built out a full portfolio of handsets from the entry-level Lumia 520 to the flagship Lumia 1020. Microsoft had its bright spot. But a careful look at the kinds of things Nokia had done on Windows Phone showed clearly that there was nothing preventing it from doing any of those things on Android, where it could possibly capture even greater overall market share by tapping into a richer selection of apps. Microsoft had created a monster in its own ecosystem and was now at the mercy of Nokia, which now had the option to either leave Windows Phone as an exclusive handset maker or tell the company to hit the Live Tiles altogether. Perhaps Plan "B" actually stood for "Brinksmanship."
Microsoft had created a monster in its own ecosystem and was now at the mercy of Nokia, which now had the option to either leave Windows Phone as an exclusive handset maker or tell the company to hit the Live Tiles altogether.
Owning Nokia's smartphone business will be different for Microsoft than dipping its toe into the small Windows tablet business as the company did with Surface. For one, what happens to the things that Nokia did in software to differentiate, such as Nokia Music referenced earlier? Does it survive at all? Does it remain an exclusive feature? Or does it get incorporated into the Xbox Music platform and shared with all licensees of Windows Phone and Windows (and possibly even come to iOS and Android clients?). With Surface, Microsoft differentiated in hardware while staying with the stock Windows experience available to all its licensees. But Nokia knew that it needed more to compete with other handset makers both using and competing with Windows Phone.
With the passing of Nokia's handset business, there are now (once again) no exclusive third-party licensees of Windows Phone. Before, Microsoft endured being part of the friction of two companies while one of them applied its brand and heritage to mobile hardware. Now, Microsoft will have to do all the heavy lifting itself and without Nokia's brand and as part of a much larger company. Microsoft has shown it's been able to create a homegrown category leader in Xbox. But the games for its console are nothing compared to the game of global smartphone competition.
Ross Rubin is principal analyst at Reticle Research, a research and advisory firm focusing on consumer technology adoption. He shares commentary at Techspressive and on Twitter at @rossrubin.