Microsoft’s (MSFT) decision to purchase Nokia’s (NOK)device unit signals a big shift in the way it approaches mobile phones. This is a $7.17 billion bet on making the company work a smartphone market that has largely frustrated Microsoft so far—and it’s an attempt to find that elusive success by impersonating Apple (AAPL) instead of Google (GOOG).
As it stands, the mobile-phone market is dominated by two visions. In the Apple model, one company makes an operating system, designs the hardware to run it, and sells the whole package under its own brand. Then there’s Google, which offers up Android free of charge to any device maker in need of an operating system in the hope of reaping benefits from more people looking at its ads, which is where the company makes its money. Between the iPhone and Android software, the two companies control about 92 percent of the smartphone market.
Microsoft is stuck in the middle. It has Windows Phone, a smartphone platform, but it wants to live off licensing fees, rather than the reflected glory of advertising. It offered its smartphone platform to hardware companies, but after several years in the market 80 percent of Windows phones came from Nokia through a special relationship between the two companies. Nokia was completely outgunned by the big players; even though its new smartphones get pretty good marks from critics, the gadgets gained little traction with consumers. By bringing the whole operation within Microsoft, the larger company can make a stronger push to make a dent in the mobile market while exerting complete control over its products.
Sound familiar? This is Apple’s model. The iPhone was immediately compelling to customers and developers because its hardware and software worked so well together—and because Apple was already a sexy brand. Microsoft is betting it can do the same thing, perhaps aside from the sexiness. If you need a job done right, you do it yourself.
Some problems lurk in aping Apple. For one thing: the Surface. Microsoft made the tablet on its own, and that hasn’t really been working out. Plus the move into mobile-phone manufacturing could alienate existing Windows Phone partners. If Microsoft is directly competing with other phone makers, those companies could lose interest in building phones that run its operating system. This could neutralize a potential advantage, says Al Hilwa, an analyst at IDC, given that phone companies hunger for an alternative to Android as Google’s software grows scarier in its scale.
Microsoft needs to do, well, something to give its mobile business some sort of kick in the pants. It needs more customers to convince more developers to make apps for its phones, and vice-versa. “This could be a make-or-break point for whether they continue to have supporters on the phone side, like Samsung (005930:KS) and HTC (2498:TT),” Hilwa says. “The phone makers need options. The question is: Is this the option they want?”
The shoes were once on the other feet. In the mid-1990s, Apple was puttering along with an insubstantial portion of the PC market while designing its own devices and the software they ran on. Microsoft, meanwhile, was ascendant: All kinds of companies clamored to make machines that ran the Windows operating system, and the dollars flowed. So Apple began licensing its software to other PC companies in the hopes of expanding its audience. The idea didn’t work out, Apple was forced to retrench, and an old chief executive the company had once fired came back. You know what happened next.
The key to Apple’s success in the post-PC world has come largely by making devices that are prettier and simpler than anything else on the market. It had to be itself. Microsoft now wants to be a mobile-phone company that looks a lot like Apple. But is that really what Microsoft is?