The biggest corporate rumour of the last two years came true on Tuesday when Microsoft announced the acquisition of Finnish handset maker Nokia.
The Redmond-headquartered firm is buying the world’s second-largest mobile manufacturer for just $7.2 billion, even less than the price it paid for buying Internet phone company Skype in 2011.
The deal raises one pertinent question: Is it the beginning of the end for pure-play mobile device makers?
A complete handset ecosystem requires design, hardware, software as well as applications.
And having it all under one roof leads to lower costs and faster device upgrades.
Apple, to that extent, controls all of these. It has built its own hardware and the software it runs on. Besides, it has a strong ecosystem of services and apps. In contrast, Nokia has been largely a hardware firm and remained so longer than it should have been.
That, perhaps, is where it started losing.
“The ability of hardware makers to make high margins on devices has come down dramatically as most of the patents are with software players, which have the upper hand,” said Sivarama Krishnan, Executive Director (Risk Advisory Services), PricewaterhouseCoopers India.
The result is that the owner of the patent gets more loyalty than the hardware maker. Also, the cost of hardware R&D is very high and players require high margins and volumes to be successful. In such a scenario, being a pure-play hardware maker is risky, as the Nokia story has proved.
Anshul Gupta, Principal Research Analyst at Gartner India, agrees. “Companies have to overlay services on top of hardware to create a differentiation, as the mobile market is now commoditised. Together, Microsoft and Nokia control the entire ecosystem and can do better than they were doing separately,” he said.
This raises questions about the long-term sustainability of players such as Taiwanese handset firm HTC and Research In Motion (maker of BlackBerry devices). Both are largely hardware firms, treading the risky path.
Already, BlackBerry has been losing subscribers and reporting losses. Its user base shrank by 4 million to 72 million in the June quarter, forcing the company to say that it would not disclose user numbers henceforth. HTC has been cutting its revenue and earnings outlook every quarter.
“The mobile phone industry is undergoing a structural change. A primary reason for this is the disaggregation of the industry value chain. With the emergence of Qualcomm’s chips for mobile industry, Google’s Android OS and independent design as well as application vendors, the market entry barriers have reduced,” said Alok Shende, founder and director at Ascentius Consulting.
This explains why newer players will find it easier to enter the market and why it would be exceedingly difficult to be a stand-alone player specialising in hardware.