Analysts: Microsoft's gamble on Nokia leaves it isolated for Windows Phone push

Microsoft's (NASDAQ:MSFT) decision to pay around $7.2 billion for Nokia's (NYSE:NOK) devices and services unit and a license to its patents and mapping software is being cast by analysts as a bold but risky bet that could leave the two companies more isolated in mobile than they were before the deal.

According to a presentation for investors, Microsoft said the deal is intended to accelerate its growth in mobile market share and profits, create a stronger all-around Microsoft experience and ensure that Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL) do not stifle innovation in apps.

Nokia was already the dominant Windows phone manufacturer. Microsoft CEO Steve Ballmer acknowledged that Nokia's Lumia Windows Phones make up around 80 percent of Windows phone sales. However, the Microsoft chief said the move will bring the companies closer together, and is necessary to drive momentum in mobile.

"As long as we were on a model with two different companies … there was always some kind of a boundary along which it was hard to innovate from a hardware/software perspective," he told AllThingsD. "It doesn't mean we didn't do it, but we know we can improve our agility."

Ballmer also said that the companies will save money on marketing and branding and that the deal will simplify decisions on where to invest money. "We know, as we scale, we need to invest behind this business. It simplifies the business decision-making and thinking by having the economics be more unified."

Analysts at CCS Insight said they tended to agree with that assessment but also acknowledged great risks. "This decision should be positive for both companies," CCS wrote in a research note. "A more integrated approach to hardware, software and services will help overcome some of the challenges faced operating as independent entities, in terms of service integration, marketing consistency and costs, as well as time-to-market for new devices and updates."

However, CCS Insight noted that "although Microsoft has said it remains committed to licensing Windows Phone, this is now essentially a vertical strategy. The little interest that currently exists from other manufacturers such as HTC and Huawei is likely to evaporate."

On Tuesday, Ballmer countered that in a conference call and said, according to CNET, he has "talked to a number of OEMs who are more enthusiastic today than yesterday about their investment in Windows Phone."

Consumers across the globe purchased 7.4 million Windows Phone devices in the second quarter, up from 4 million in the year-ago period. That corrresponds to 3.3 percent global smartphone market share, Gartner said. That figure is way below Android's 79 percent of the market and iOS' 14.2 percent.

Industry analyst Jack Gold wrote that the fact that Microsoft didn't buy all of Nokia outright indicates several possible scenarios, including that "Nokia was in high distress as its device sales were not as good as needed to make it a long term viable player in smartphones. Two, that Microsoft really wanted to compete head to head with Apple and Google, both of which have their own [hardware] divisions and Microsoft sees this as its future. And three, that Microsoft sees great benefit in having actual product engineers with experience in mobile on the staff to invigorate the internal team at Microsoft, which to date has not done a stellar job in getting Windows adopted in the mobile space."

Still, Gold said Microsoft "now runs the risk of essentially alienating many key OEMs of mobile devices who were inclined to license Windows Phone. It may even extend to tablets, as Nokia will probably now assume the leadership position within Microsoft of designing and building tablets (especially in light of the rumored Nokia [Windows 8] RT tablet)."

Analysts also noted that Microsoft has both a major challenge and opportunity in integrating Nokia's feature phone business. Ballmer said the feature phone unit, which includes Nokia's Asha brand, will let Microsoft better reach the next billion consumers with both devices and services, a line that Nokia's Stephen Elop has often touted. Yet Ballmer acknowledged the awkward fit. "The part of the Nokia business that comes to us in this acquisition, with which we've had to do the most learning over the last several months, is the mobile phone business," he said.

"The biggest opportunity for Microsoft is in the non-smartphone space," Analysys Mason analyst Ronan de Renesse wrote. "Microsoft will gain a foothold in developing market via Nokia's non-Lumia device portfolio; 45.5 percent of Nokia mobile device shipments went to Greater China, Middle East & Africa and Latin America in 2012.  This strengthens Microsoft's position versus Google in connecting the next billion people."

Interestingly, Ballmer and interim Nokia CEO Risto Siilasmaa said this deal got started at a meeting at Mobile World Congress in Barcelona, Spain, in February, and that Nokia's board and its committees had more than 50 board meetings about it.

For more:
- see Steve Ballmer's letter to Microsoft employees
- see this this WSJ article (sub. req.)
- see this NYT article
- see this AllThingsD article
- see this second AllThingsD article
- see this third AllThingsD article
- see this fourth AllThingsD article
- see this CNET article

Related Articles:
Microsoft to acquire Nokia's phone business for $7.2B
Report: Nokia to release Windows RT tablet with Lumia design and LTE
Moody's downgrades Nokia further into junk status
Rumor Mill: Nokia to release 6-inch Windows Phone phablet, codenamed 'Bandit'
Analysis: Ballmer's departure from Microsoft puts Windows smartphones, tablets in question
Report: Microsoft plan to buy Nokia's phone biz fell apart

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