This Is Why Microsoft Needs Nokia

| About: Microsoft Corporation (MSFT)
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Recently, I saw an article published here suggesting that Nokia (NYSE:NOK) would be dead without Microsoft (NASDAQ:MSFT). While I was thinking about this, I came across some numbers that were released a few days ago. The latest numbers suggest that four out of the five Windows Phone 8 devices sold in the world are produced by Nokia. While Windows Phone 8 doesn't have much of a market share amongst the operating systems in the world, Nokia has a strong foothold in the operating system. We don't know for sure if Microsoft's operating system for the smart phones will be successful, but we know that the project would surely fail without Nokia.

Samsung's (OTC:SSNLF) market share in Windows Phone 8 was as low as 6% whereas HTC's market share was 14%. This proves that Nokia is the only company that can sell Windows phones. When people decide to buy a Samsung or HTC phone, they are far more likely to pick an Android (NASDAQ:GOOG) phone over a Windows phone. It is almost safe to assume that many people buy Lumia phones despite the fact they are Windows Phones, not because they are Windows phones. Otherwise, the Windows phones of other companies would be selling as good as Nokia's phones do.

After taking a big hit from Apple (NASDAQ:AAPL) and losing market share, Microsoft felt like it had to launch its own operating system for smart phones and tablets. Because Microsoft wasn't so big on the hardware side, the company needed backing of hardware producers. Eventually some companies including Nokia, Samsung and HTC stepped in to take this role. At first, it looked like Nokia had a special relationship with Microsoft that no other company enjoyed, but HTC took its place soon after. Not only did HTC form a strong bond with Microsoft, but it released a phone that was almost a carbon copy of Nokia's Lumia 820. Many people claimed that Nokia would go to court and try to get this phone banned, but Nokia's CEO Stephen Elop simply said "I think also when people see the quality of design, the fit and finish, and so forth, copying is one thing. Doing it correctly is something very different. We're very proud of what we've done with these devices." At the end of the day, they turned out to be correct, because Nokia's Windows phones are outselling HTC's Windows phones by a large margin.

I am definitely not arguing that Nokia should switch from Windows Phone to Android, but if this actually happened, Microsoft's future in the smart phone market would be in a huge doubt. Obviously, Microsoft's other partners aren't selling enough copies and Microsoft's attempt of making its own tablet hasn't been rewarded that greatly either. If Microsoft can't gain much market share in the tablet market by itself, there is very little reason to believe that it can gain market share in the smart phone market without Nokia's help. Therefore, if Nokia stopped committing to Microsoft's goals, the company's goals would be in huge jeopardy.

Let's face it, Google acquired Motorola in order to produce its own smart phones, and things haven't worked that greatly for the company so far. Google got lucky because Samsung gained a lot of market share using Google's operating system Android. If it wasn't for Samsung, Google might have been in a very similar position to where Microsoft is today. If Microsoft's partnership failed with Nokia, the company would have to take the matter to its own hands, acquire another mobile phone company and build its own phones. There is very little reason to believe that Microsoft's own phone would be more successful than Google's Motorola project.

Of course, if Microsoft were to acquire Nokia and continued to produce smart phones under Nokia's name, things might be a little different. Whether Microsoft acquires Nokia or keeps it as a partner, it definitely needs Nokia in order to gain any traction in the smart phone market.

Currently Windows Phone enjoys a global market share of 3%, which is expected to climb to 10-12% by the end of the decade. Excluding Nokia phones, the current market share would have been below 1% and 2020's market share would be around 2-3%. In the last four quarters, Nokia sold nearly 14 million of the 18 million Windows phones that were sold globally. I definitely don't see this trend changing anytime soon. In fact, Nokia's market share in Windows 7 ecosystem was around 65%, which means that Nokia is gaining even more market share within the ecosystem as its market share approaches 80%. Samsung and HTC might even drop out of the Windows ecosystem if they realize that Windows phone will not be profitable for them.

At the end of the day, Microsoft needs Nokia desperately if it wants to compete with Apple and Google in the smart phone market. Without Nokia, Microsoft has very little chance of surviving in this market. Of course Microsoft will not go bankrupt or anything because the company has other business segments which are very profitable. On the other hand, the company wants to become a major player in the smart phone market and this is the only chance it has before it is too late.

I'm long both Nokia and Microsoft. I keep adding to my Microsoft shares whenever the share price approaches $26 and I may add to my Nokia shares if it falls below $3.5.

Disclosure: I am long NOK, MSFT, AAPL. 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.