In September, after months of rumors and negotiations, Microsoft (NASDAQ:MSFT) bought Nokia (NYSE:NOK) for $7.2 billion. The purchase gave Microsoft an instant, albeit precarious, position in the mobile device market. In a head-on collision course with its two main competitors, Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL), does Microsoft stand a chance at making an impact in the mobile marketplace?
This summer, in an email to all of its employees, Steve Ballmer, CEO of Microsoft , explained his vision for the future of the company. His strategy involves offering a range of services and products, both software and hardware, to compete with Google and Apple. One of his main goals is now taking shape. By purchasing Nokia's mobile device business Microsoft is expanding upon the partnership the two companies signed in 2011. In effect, Microsoft has taken over the Asha phone business, the Lumia smartphone division as well as licensing a portfolio of Nokia's patents, as well as a major Nokia unit responsible for the development of applications and services linked to the Nokia mapping division named Nokia Here.
This acquisition marks a turning point in Microsoft's strategy. With Windows Phone, Microsoft had initially planned to take a page from its desktop operating system strategy and focus primarily on operating system and software development, while entrusting the physical device creation to other manufacturers such as Samsung, HTC or Nokia. But the hardware partners proved inadequate in their abilities. After years of slow growth and unsuccessful product launches from its OEM partners, Microsoft was forced to bring hardware production in house. This move was further precipitated by financial difficulties faced by partners HTC and Nokia. And in 2011 when Google decided to purchase Motorola, the writing was on the wall. Microsoft would be forced to manufacture their own mobile devices if they wanted to compete.
One thing is absolutely certain; the competition will be fierce and Microsoft is facing an uphill battle to win over consumers. If Microsoft want to stand any chance at developing a profitable mobile phone division, they must follow these 3 key points.
1) Design: Nokia's Lumia phones are eye catching and innovative, but consumers want something more. Microsoft must work on developing something which clearly differentiates their phones from the competition. Whether it is a technological gimmick of having a transparent phone or a flexible display or any other innovative add-on which can be offered, Microsoft must absolutely announce something which will immediately create excitement and buzz.
2) Distribution: Windows Phone currently has a pitiful 3.3% market share. Microsoft must focus on getting all major US and international carriers to offer and in fact feature their phones. Currently, with the new Nokia Lumia 1520 Windows Phone, AT&T (NYSE:T) is the exclusive carrier. This will negatively affect sales. Microsoft must work harder on making their phones available on all major carriers. It's a Catch-22 situation since major carriers are reluctant to offer phone platforms which have a low market share, but the only way for Microsoft to increase the consumer adoption of their phones is if more carries offer their devices. Given Microsoft's large cash position on their balance sheet and seeming willingness to lose money with the goal of breaking into new markets, Microsoft would be smart to offer all carriers strong incentives to actively promote their devices.
3) Integration: The mobile device market is all about ecosystem and platform integration. Microsoft must leverage their position as the leading desktop operating system provider to influence users to adopt the Windows Phone platform. In their SkyDrive cloud service and Windows Store app platform, Microsoft is working to show consumers that they have a powerful ecosystem, offering support, customizability and integration options. Considering their small share in a market saturated with Android and Apple devices, Microsoft is starting from a position of weakness, but by using their commanding position in the desktop arena, they may be able to educate consumers of their mobile offerings and persuade some to capitulate to the Windows Phone platform.
Microsoft is facing an uphill battle to win over consumers after entering the smartphone platform war very late in the game. With Microsoft currently searching for a new CEO to replace Steve Ballmer, it is certain that they want a leader who has a strong vision and a clear path for success in the mobile market. It will be interesting to see if Microsoft can leverage its strengths and give Apple and Google a run for their money.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.