Google’s Moto Sale Casts Doubts on Microsoft’s Nokia Plan

Google Inc. (GOOG)’s sale of Motorola Mobility holds a clear lesson for Microsoft Corp. (MSFT)’s acquisition of another smartphone maker, Nokia Oyj (NOK1V): Be a hardware or software company, not both.

Lenovo Group Ltd. (992)’s purchase of Motorola’s consumer-hardware business, which Google bought two years ago for $12.4 billion including patents, lets the search company refocus on software and exit competition with other manufacturers of smartphones based on its Android software.

Microsoft is on track to close its $7.4 billion acquisition of Nokia’s handset business this quarter, seeking to regain lost ground in a market where its 3.7 percent share is eclipsed by Android and Apple Inc.’s iPhone. Unless Microsoft can combine software and hardware as expertly as Apple has done with its products, the software maker will be better off without Nokia, according to Michael Cusumano, a professor at Massachusetts Institute of Technology’s Sloan School of Management.

“There’s no point in having a hardware unit inside a software company unless you marry the two the way Apple does,” Cusumano said.

While scrapping the Nokia deal isn’t a likely prospect right now, Cusumano said it could happen later. Microsoft, which is in the middle of a search for a new chief executive officer, has staked its future as a devices and services company. Steve Ballmer, who is retiring as CEO once his successor takes over, reorganized the Redmond, Washington-based company around the strategy last year and sealed the Nokia deal in September to accelerate the transition.

Photographer: Mike Fuentes/Bloomberg

So far, Microsoft’s plan is to continue with the path that Google tried with Motorola, selling hardware that competes with software sold to rival manufacturers. Close

So far, Microsoft’s plan is to continue with the path that Google tried with Motorola,... Read More

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Photographer: Mike Fuentes/Bloomberg

So far, Microsoft’s plan is to continue with the path that Google tried with Motorola, selling hardware that competes with software sold to rival manufacturers.

Frank Shaw, a spokesman for Microsoft, declined to comment.

No Choice

Microsoft, which pioneered the personal-computer industry by selling software and letting Dell Inc., Hewlett-Packard Co. and other manufacturers build machines, initially followed the same blueprint in the phone market. Microsoft spent more than a decade trying to replicate its success in PCs with the Windows operating system, only to fall behind Apple and Google.

While Microsoft has demonstrated with its Xbox gaming consoles -- now in their third generation -- that it can successfully marry hardware and software, the Nokia acquisition was a necessary step, according to Avi Greengart, a consumer-devices analyst at Current Analysis. Without Nokia, Microsoft would be left with essentially zero market share in phones and tablets since Nokia sold more than 90 percent of Windows Phone devices last year, he said.

“Google did not need to buy Motorola,” Greengart said. “I don’t think Microsoft had much choice.”

Same Path

Microsoft also faces a $750 million breakup fee if it walks away from the Nokia deal, which is awaiting regulatory approval in China.

So far, Microsoft’s plan is to continue with the path that Google tried with Motorola, selling hardware that competes with software sold to rival manufacturers.

Terry Myerson, the Microsoft executive vice president in charge of operating systems, said in September that the Nokia deal doesn’t alter the company’s commitment to its handset partners.

“I don’t shine if you don’t shine,” Myerson wrote in a blog, quoting a lyrics from a song by The Killers, “Read My Mind.”

Prospects for Microsoft’s melding with Nokia are also brighter in some ways than they were for Google and Motorola, since the companies have been working closely together since Nokia scrapped its Symbian software platform in 2011 in favor of Windows Phone, said Al Hilwa, an analyst at IDC.

“Microsoft will have to a lesser extent a cultural problem because the Nokia workforce has adjusted a lot in the last few years,” Hilwa said.

Same Conversation

Google’s decision to sell Motorola Mobility, which could end up generating a loss of several billion dollars, highlights the complexities of competing with partners, according to Gene Munster, an analyst at Piper Jaffray Cos.

While large Android smartphone makers such as Samsung Electronics Co. (005930) and Lenovo had few alternatives to Android, having to go up against with Motorola Mobility was a source of tension. After the acquisition, Google promised the Motorola group wouldn’t get any special treatment, such as early access to new versions of Android, and kept the Motorola group separated in another building from the Android team.

“It’s interesting to see Google back out of trying to be a software company and a hardware company,” Cusumano said. “I wouldn’t be surprised if we’re having the same conversation about Microsoft two or three years from now.”

To contact the reporters on this story: Peter Burrows in San Francisco at pburrows@bloomberg.net; Dina Bass in Seattle at dbass2@bloomberg.net

To contact the editor responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net

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