With the acquisition of Nokia, Microsoft is trying to control the hardware along with the software it already has. However, Microsoft’s ability to rally software developers, rival device makers, telecom companies and distributors is still speckled with doubt.

Forking out $7.2 billion of its $77 billion cash in its books, Microsoft acquired Nokia’s handset business and its patents, which are not exclusive to the Redmond-based giant. This move is an attempt by Microsoft to maintain its leadership in the software side (example Microsoft Office), as users are beginning to turn away from Microsoft software on devices such as desktops. “It is a good deal that has come with a good price but beyond that what it offers is the question.” says Shiv Putcha, Principal Analyst, Emerging Markets, Ovum.

At the outset, the logic seems pretty straightforward. After years of trying to make personal computing devices - the latest being the Microsoft Surface tablet - and an operating system that is at the heart of many computing devices, Microsoft now gets access to Nokia’s technology. It seems to have gone with this line of thought after Google acquired Motorola’s handset business a few years ago.

But competitor Google in its deal with Motorola, bought out the 17,000 patents held by the latter. “I am curious to see how much of Nokia's patent portfolio will be passed to Microsoft. We know that about $2 billion of the deal involves Nokia's patents; however, we don't know specifics like whether some patents will be permanently owned by Microsoft after the transaction is complete,” points out Holger Mueller, Principal Analyst & VP, Constellation Research. The issue of patents is an important one as can be seen from the Apple-Samsung battle.

According to research firm International Data Corporation (IDC), access to Nokia’s design patents and related Intellectual Property (IP) can be leveraged to drive innovation around Nokia’s smart phones especially Asha and Lumia series of handsets. “With a common kernel, which is the central part of an operating system and closer integration between different Windows devices, it is imperative for Windows to create its own experience and speed-up innovation, added IDC.

Industry watchers believe that beyond patents, the whole technology landscape is changing and Microsoft seems to have gone with the logic that it needs to get in the hardware ring if it has to fight more effectively with Apple and Google. Typically, a majority of the smartphone makers run on the operating systems provided by Google called Android.

Microsoft, after an initial struggle with its Windows Mobile operating system (that ran on Nokia, HTC and some other mobile phones) now hopes that it can crack the code and emerge as a strong contender in the Indian smartphone segment, which according to research group Covergence Catalyst estimated to be around 20 million in 2012.

Running against time

This could be the last big push from soon-to-retire Microsoft CEO Steve Ballmer. With this, he is trying to bring in hardware, woo software developers and continue to leverage on its brand loyalty in markets like India. “Despite losing market share over the last few years, Nokia has a strong presence and with a closer integration, they will take market share from competitors,” says Anshul Gupta, Principal Research Analyst at research group Gartner. Nokia does not give out country-specific numbers but according to a recent study from Voice and Data, it is behind Samsung and ahead of Apple, BlackBerry and Indian phone makers too.

Globally, Windows Phone has a 4 per cent market share, a 77 per cent increase over 2012 but still a far cry from the 90 per cent market share that it has in Windows operating system.

However, analysts are still not convinced about the combined prospects. “More devices increases mind share, which comes with better user experiences and pulls software developers onto your platform but currently that is not the case,” says Putcha. This highlights the fact that no matter how good a device is, all that matters is how many consumers are opting to buy and use it.

Consumers want to adopt more mobile phone technology without having to pay for licenses as was the case with traditional PCs and Microsoft seems to have grasped that, according to Gupta.

Microsoft’s unsuccessful attempts at selling hardware have not helped its cause. Earlier, the strategy of selling Windows licenses bundled with PCs manufactured by HP, Dell and others have worked for Microsoft. Customers could not live without it and that helped the distributors’, device makers’ and Microsoft’s cause. But with changing consumer preference, favouring more smartphones and tablets, Microsoft was slow to change. And when it finally did, it seemed like it was too little, too late. Recent examples of Windows 8 OS and $900 million inventory write-down last quarter for Surface tablets highlights this lag. To be fair, Microsoft has been somewhat successful in the hardware business. Its entry into devices with the Xbox product line, which has expanded from being a gaming console to becoming a distribution system for digital content has seen sales globally of 78 million units. However, while Xbox has succeeded, the same cannot be said of its other mobility devices, says Putcha. Agrees Mueller, “At the end of the day Microsoft needed to correct its weak position in smartphones.”

In a way it is in the process of starting from scratch. The acquisition of Nokia deal could grow the smart phone segment in India and potential price cuts could be in the horizon. According to IDC’s Asia Pacific quarterly mobile phone tracker, vendors shipped a total of 9.3 million smartphones in the second quarter of 2013 compared to 3.5 million units in the same period of 2012, an almost three-fold rise.

Nokia through its Lumia and Asha series of smart phones was earlier paying licensing fees to Microsoft. However, after the acquisition, Nokia does not have to fork out licensing fees and this in turn would be passed on to consumers, opine analysts. “Apart from the cost benefits being passed on to the consumer, in this way, Microsoft can gain market share,” said Tanu Sharma, Associate Director, India Ratings & Research, a Fitch Group Company.

In a note regarding the acquisition, IDC pointed out that this may open up possibilities for Microsoft to lower its mobile OS licensing costs, thereby bringing down the total cost of owning a mobile device.

However, India is dominated by feature phones, which form 90 per cent of the market for phones in the 2013 fiscal and Nokia dominates in India, according to India Ratings & Research. 898 million mobile phone subscribers, as per TRAI data, with a 61 per cent user base in urban areas and 39 per cent in rural areas.

Majority of the analysts see this acquisition as a gamble, although most think it’s one that will pay off. Whether Microsoft considers this a last-ditch effort or just a starting step of its imminent rise to make a mark in the smartphone business, only time will tell.

venkatesh.ganesh@thehindu.co.in

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