Microsoft Is Finally Getting Serious About Ecosystem Expansion

| About: Microsoft Corporation (MSFT)

According to sources over the weekend, Microsoft (NASDAQ:MSFT) is in talks with Sony (NYSE:SNE) and ZTE on a deal that might give a boost to Microsoft's struggling WP8 OS. Sources say that upon the consummation of the deal, Sony will offer a Windows device as early as the second quarter of 2014. Microsoft is also reported to be in talks with Chinese smartphone maker ZTE.

It seems Microsoft is finally getting more aggressive to expand its ecosystem and take some market share from Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL). But this revelation is probably not much of a surprise. Last month TheVerge reported that Microsoft is considering making WP8 and Windows RT available free of charge to device makers.

See, since Microsoft will no longer receive any royalty revenue from Nokia, the next logical step is to give its OS away for free like Google does. What's the point in counting on any royalties at this point, since Nokia has about 90% of the WP8 market anyway?

Will this move expand Microsoft's smartphone ecosystem?

The answer is yes. Sony for example has been making smart devices exclusively for the Android OS for more than four years now. So having a major player like Sony on board is a sort of a small victory for Microsoft.

As for ZTE, the truth of the matter is that Microsoft desperately needs a major Chinese OEM on board, because Nokia can not compete on price with Chinese device makers. It is probably better to let several Asian OEMs expand its ecosystem in Asia, than taking a chance on Nokia failing at such an endeavor. For ZTE this is also a win-win move. Since it will probably cost it nothing to license WP8, making a WP8 phone will simply give it another product to sell.

Besides there is something else in play. Having two big OEMs in Asia will permit Microsoft's Nokia division to focus on western markets. Besides, Microsoft will probably exit the very low-end segment of the market when the Nokia acquisition is completed anyway. Microsoft knows it can not compete with the Chinese in the low-end segment of the market. But even if it can, it probably does not want to.

Since Microsoft is not counting on royalties anymore, it will probably try to make money from device sales. That is not an easy thing to do these days. Unless you can sell high end value added devices, low end devices will not make you any money. Nokia's inability to make any money for years is a testimony to that. And Apple is a testimony to the fact that only high end devices makers make any money.

The bottom line

Microsoft's rumored deal with Sony and ZTE (to the extent that it ferments) will definitely help Microsoft expand it device ecosystem. If it actually makes any money from this expansion is something that remains to be seen, because in order to entice both companies to produce WP8 devices, it will probably end up giving it OS for free.

However Microsoft might benefit from the fact that Nokia will have more room to think about its strategy in western markets, where he average buying power of western consumers is much higher than that of Asian consumers.

And this is exactly the segment of the market Microsoft needs to go after with Nokia, because selling low end devices will probably prove a costly proposition looking forward.

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.