Nokia and Microsoft Declare “War”
by Mark W. Hibben
The Mother of All Battles
In Stephen Elop’s announcement of the Nokia-Microsoft partnership at the Nokia Strategy and Financial Meeting on 2/11/2011, he called “a war of ecosystems” what I have termed the War for Mobile Internet Supremacy (WMIS). He used the term to make a couple of points. First and foremost, the use of the word “war” was intended to convey that this is no mere business competition, but a battle for survival that will leave none of the combatants unscathed. Secondly, that each of the competing entities, Apple and its suppliers, Google and its manufacturing allies, Microsoft and its manufacturing allies represent an interdependent complex of companies and interests. For “ecosystem”, he could just as easily have used the term “business alliance” or keiretsu, but he chose to overlook the fundamental importance of the respective competing operating systems. They who control the operating system lead their respective alliances, and Nokia, for good or ill, has ceded leadership to Microsoft. When I first started writing about the WMIS back in February 2010, I perceived that it was fundamentally a war between mobile OS’s, and the three participants I identified then, Google, Apple, and Microsoft, have indeed become the leaders of their respective alliances.
Why Not Android?
Once the rumors of a big announcement by Nokia came out, financial analysts were quick to fasten onto Android as the better, “lower risk” choice compared to Microsoft, an acknowledgement, once again, of the poor performance of Windows Phone 7 in its debut. That the financial community is disappointed by the alliance with Microsoft is evident from the punishment Nokia’s stock has taken since the announcement (roughly an 18% drop as of this writing). Part of this disappointment may be due to the nature of the partnership, which, as I anticipated last week, is non-exclusive: Microsoft will continue to make Windows Phone 7 available to other manufacturers and Nokia will continue to make and sell Symbian OS smart phones. While the lack of a “clean break” by either Microsoft or Nokia may leave analysts dissatisfied, the companies are simply bowing to pragmatic necessity. As Nokia acknowledged in the financial briefing, Nokia sells many more Symbian phones (roughly 5 M in the last quarter), than were shipped WP7 phones (1.5 M). Nokia simply can’t afford to give up the revenue stream.
But why not Android? This was inadequately explained by Elop both in his opening statement and in the subsequent Q & A with Steve Ballmer. At one point, Elop seemed to say that Nokia couldn’t joint the Android “ecosystem” because that would mean Android would win the WMIS by default, betraying, perhaps, some residual favoritism towards his former employer. The other basic reasons he offered were an assumed inability by Nokia to differentiate its products within the Android ecosystem and pressure on revenues by “commoditization” within Android. Perhaps the most important reason for the partnership was that the partnership with Microsoft would allow the reduction of near-term expenses associated with Symbian development and provide a net gain in operating income. We shall see. If the reasons for not selecting Android seem poorly motivated, they should. If product differentiation was really a driver in the decision-making, one would have thought that Android was the more logical choice. After all, Android is at least open source, allowing as much customization as the phone manufacturer wants to fund. With Nokia’s Symbian experience, developing a Nokia-flavored version of Android would have been well within the realm of possibility. Although it was asserted that Nokia would put its stamp on WP7, one has to question how deeply this will go. Allowing others into the inner sanctums of OS development goes completely against the corporate grain of Microsoft. As for commoditization effects, one has to wonder why this isn’t a concern with WP7 as well.
If the WP7 ecosystem is triumphant, this will surely encourage more manufacturers to join it, as Elop himself acknowledged, and even asserted was a good thing to achieve “critical mass”. As one might expect, the question of Android became a major focus of the Q & A session, as can be seen in the video below.
It may be that some the considerations for the Nokia-Microsoft alliance remained unspoken. Although both Ballmer and Elop paid lip-service to the concept of fostering the WP7 ecosystem with multiple manufacturers, it’s not obvious why any of the current WP7 phone manufacturers would stay in the game if Nokia is receiving preferential treatment by Microsoft. To be sure, that preferential treatment comes at a cost, but Nokia appears to be paying to some extent with offerings of its own such as NAVTEQ, location based services, and local marketing assistance that the other WP7 manufacturers can’t offer. It may be that both Microsoft and Nokia expect the other WP7 makers to drop out over time as Nokia becomes dominant, or at least move down market in the WP7 space. A well-integrated Microsoft-Nokia team seems to be where they’re headed, judging by all the talk about “complementary” assets and capabilities.
Who Will Win the WMIS?
First, let's be clear about what winning means in this context. Winning is all about market share when it comes to the mobile device business. The ecosystem that becomes dominant in market share will grow explosively with the growth of the mobile device business and be able to leverage that share to sell apps, internet-delivered content of all types, and advertising. Achieving market dominance will probably lead to the collapse of the competing ecosystems and withdrawal from the war by the participating companies or a joining with the dominant system. The virtuous cycle for the dominant system becomes a vicious cycle for its competitors.
Let's also be clear that the WMIS isn't just about phones and tablets. Although Apple fans may shudder to hear this, they really need to pay attention. Anything you can carry around with you, use to connect to the Internet via WiFi or a cellular data network, and which costs somewhere in the US$500 – US$1000 range is a potential weapon in the WMIS. That includes netbooks and low cost ultra-light notebooks like the MacBook Air. According to Gartner Research, netbook sales last year were 33 million and total notebook sales were over 200 million, so these types of devices are important in the WMIS, and this is where Microsoft is still doing well, despite the current state of WP7.
My point here is that focusing exclusively on phones and tablets ignores the fact that the competing ecosystems need to include traditional desktop OS's as well. The boundary between Mobile OS and Desktop OS has become and will be increasingly blurred as the capability of mobile devices improves. This started with iPhone OS, which was in a very real sense merely a derivative of Mac OS X, as Apple has acknowledged. Apple derives economies of scale by using a common OS as the basis for both its desktop and mobile products. Microsoft does as well by incorporating Windows 7 into ultra-light laptops and netbooks, although it's not clear to what extent, if any, WP 7 builds on Windows 7. Who will win? I don't know. At this point, Apple appears to have the upper hand, but I also have a vague sense that Apple's fortunes are already past their zenith, as Android 3.0 tablets such as the Motorola Xoom wait to be unleashed.