The Microsoft-Nokia deal: Fail plus fail equals more fail
”We must indeed all hang together or, most assuredly, we shall hang separately.” Benjamin Franklin reportedly said this during the signing of the Declaration of Independence. But this quote can also be used to explain the Microsoft-Nokia deal, which cedes Nokia's smartphone business to Redmond for a tad over $7 billion.
Don't like the Franklin quote? Then you can adopt a much more pessimistic school of thought: Microsoft and Nokia may have simply thrown a rope to one another, cried “Save me!” and jumped off a cliff in unison.
In the wake of the deal's announcement, a number of stories have been generous in reporting Microsoft's acquistion—or have at least failed to reality-check the tenability of the deal's greater goals. That's fine. Frankly, Benjamin Franklin’s take on the matter is probably a reasonable, fair interpretation of Microsoft's and Nokia's motivations. But the Franklin philosophy is also predicated on the notion that both sides end up winning—and there’s little guarantee that will be the case.
Windows Phone is the world's third most popular smartphone platform, and, as Microsoft notes, outsells BlackBerry in 34 markets around the globe. But trumpeting these numbers is like praising Windows Phone with thinly veiled criticism. Worldwide, Windows Phone commands a paltry 3.3 percent market share, up from 2.6 percent a year ago. Yes, BlackBerry fell from 5.2 percent to 2.7 percent during the same period. But with 79 percent market share, Android is outselling WIndows Phone by 25 times.
”Since when does a combination of a struggling consumer software and hardware company make sense?” Patrick Moorhead, a former AMD fellow who chased Intel for his entire career, wrote in an email. “This acquisition doesn’t address why Windows Phone has been unsuccessful so far in driving big-time market share. It’s not a resource gap at Nokia, Samsung or HTC. It’s not a proximal issue between Nokia and Microsoft. The problem with Windows Phone is that it has been in catch-up mode for years, unable to come up with the killer feature.”
Fred Wilson, the principal at Union Square Ventures, has also become a locus of criticism about the deal. “My view is twofold,” Wilson wrote. “One, that Microsoft had to do this. The future is in mobile devices, not PCs, and they need to increase their focus and investment on Mobile. I am not sure this will work, but I also don’t see that they had a choice. Two, that this changes nothing. Android and iOS are dominant and becoming ever more so.”
Microsoft’s argument is that “devices help services and services help devices.” In essence: Consumers will buy great devices and be rewarded by Microsoft’s services layered on top of them. Anecdotally, at least, that’s true: My wife owns a Windows Phone, loves it, and hopes that eventually the Lumia 1020 will be supported by T-Mobile. (And maybe, with a little fiddling, it will.)
But Microsoft's strategy pays no respects to a very stark reality: Very few people currently love Windows Phone, and doubling down on the platform via a Nokia acquisition may be throwing good money after bad.
“Windows Phone is failing because of a classic vicious circle: Consumers will not buy it because it has very few apps, and developers will not target it because very few consumers own one,” Benedict Evans, a former group strategy manager at Orange, wrote. “There may be 20-30 million Windows Phones in use, but there are 250 million iPhones and over 900 million Android phones out there. As a developer, any investment you make in Windows Phone is investment you’re not making in iOS or Android, and that opportunity cost delta is huge... The ecosystem itself is sub-scale and that is self-perpetuating.”
If anything, the Microsoft-Nokia agreement reduces the chances that Windows Phone will succeed, as it will prompt other OEMs to give up on it entirely, Evans wrote. That model has worked before with Apple, Moorhead noted. "But now, there's almost no hope for an ecosystem," Moorhead said.
Ben Thompson, a former business development and partner manager within the Windows Phone app team at Microsoft, also criticized his former employer. “The war is over, and iOS and Android won,” Thompson wrote. “It would be far better for Microsoft to focus on serving and co-opting those devices, instead of shooting the most promising parts of their business in the foot for the sake of a platform that is never going to make it.”
And Microsoft can’t simply offload those costs to another company, either. Microsoft just picked up 32,000 employees, many of whom are employed in Finland. Of those, a whopping 18,300 are involved in manufacturing. As of June 30, Microsoft employed just under 100,000 workers, meaning that it will grow its workforce by nearly a third. And let’s face facts: Microsoft and Nokia will undoubtedly treat its Finnish employees fairly, while Asian contractors employed by its rivals skate by limiting worker pay and living conditions.
As consumers, we should root for competition. Windows Phone is a magnificent piece of engineering, an ambitious design effort, and enjoyable to use. And Windows Phone’s app problems aren’t as bad as consumers perceive. The company either directly or indirectly supports the top tier of apps, either via the developers themselves or third-party knockoffs. Nevertheless, consumers won’t buy a Windows Phone because of three problems: the platform's perceived lack of apps; its struggles to provide a competitive mapping app; and poor integration tying services together.
The Nokia deal solves the mapping issue. But make no mistake: Windows Phone is circling the drain—not inevitably, but certainly. And a drowning man grasps at whatever straw he can clutch.