On the Microsoft – Nokia merger

Today’s commentary

Summary: I have been saying for two years now that Nokia is toast because it has hitched its wagon to an also-ran in the smartphone race. The only out for the company is a takeover by Microsoft and now this is done. Will it work though?

I am back after a long Labor Day break and I wanted to jump in here with a few thoughts on Monday night’s announcement that Nokia’s mobile handset business is being taken over by Microsoft. I first started talking about Microsoft and Nokia forming an alliance when the dance first started in February 2011. Back then Nokia’s Symbian OS was still the dominant one among all handsets because the shift to smartphones in the mobile space was not as vigorous as it now is. So it made some sense for Nokia to ditch Symbian and move to smartphones. But Microsoft was and is an also-ran in this market.

However, we knew early on that all the mobile users with cheapie Symbian phones will switch to Android. I eyed Android as the right platform from the start due to it’s ‘openness’ because open beats closed when you want to amp adoption rates by manufacturers. What we have seen is that every technology company that can enter the mobile market has done. And there is really only one OS which has share and is ‘open’ for them to do almost anything they want on – and that’s Android. This guaranteed huge share for Android. So it was a mistake for Nokia to choose Microsoft over Google in the first place.

By June of last year I was writing headlines like “The Nokia story gets worse by the day“.  What I said then is what I believe today about Blackbery and Nokia:

“I think network effects in the mobile space revolve around platform Apps and each platform’s cloud computing stickiness. Put simply, there are really few switching costs in the mobile space except sunk costs from App purchases and platform inertia. This is not Windows vs. Mac where your data simply could not port or you simply could not link in to existing networks. Today, data has become a lot more platform independent. You would think this favours Nokia’s eventual success given it’s existing sales channels. But I don’t think there is room for any more than two platforms given the weak network effects that do exist.

“For me, that says RIM and Nokia are toast. At least Nokia can be bought out by Microsoft. RIM is flying solo and will crash and burn.”

Nokia has now been bought by Microsoft and RIM is still flying solo, perhaps to crash and burn. The question is whether there is room for another player beyond Apple and Android in mobile then? My answer is no. But the fact is that Microsoft HAS to get into this space in order to transition from the PC market. So they will try every trick in the book to stay competitive. You can bet that the new Microsoft-Nokia combination will be around for a long time then.

My sense here is that Microsoft knows it needs to take share. And so they are going to go for broke at the low to mid-end of the market while selling a few high-end phones too as their jewel in the crown. This will put enormous downward pressure on average selling price (ASP) in this space. Just you wait. Note that Google is now selling a very high quality Nexus 4 phone unlocked and unsubsidized  in the US for $100 off at $199. That’s a ridiculously low price and this is where we are headed in this market. Apple will haemorrhage market share and profits will fall. Apple is the big loser in a Microsoft-Nokia merger regardless of whether Microsoft can be successful. It is unclear whether Samsung will be hurt badly because they have a supermarket strategy of filling every available niche in the market. And so while their ASP may decline, share might not.

Those are my initial thoughts. More later

Links are coming today in a separate post.