Microsoft and Nokia: A Strategic Blunder

Steve Wildstrom / September 3rd, 2013

There’s an old military adage, “Reinforce success; never reinforce failure.” By purchasing Nokia’s device business for about $5 billion, Microsoft has just reinforced failure in a big way. It has been three years since Microsoft attempted to reboot its mobile business with Windows Phone 7, two and a half years since the company struck a broad partnership with Nokia, and a year since the introduction of Windows Phone 8 and the Surface tablet. Microsoft has next to nothing to show for any of these efforts.

Microsoft can easily afford the purchase price; it has the money lying around under the cushions of various couches around the world. The issue is one of strategic focus. At a time when Microsoft should be turning its attention to its successful core businesses to build for the future, it is redoubling  its efforts in an area where it is struggling, at best.

Microsoft financials chartAt a time when it should be thinking about the strategic direction of  a new CEO, Steve Ballmer in his remaining months and his now probable successor, Nokia CEO Stephen Elop, who will become a Microsoft executive vice president, will instead be devoting a lot of time and effort to integrating Nokia. The money-losing device business had about $15 billion in revenues last year, which would make it Microsoft’s fourth largest division (see chart.) But its 32,000 employees will increase Microsoft’s worldwide employment by nearly a third. A Finnish hardware unit and Microsoft, the quintessential software company have cultures that likely will resist easy integration.

The challenges for Nokiasoft are overwhelming. I thought for a long time that there was room for a third platform in mobile phones and that Windows Phone might well be it. But Microsoft, even with the Nokia partnership, has yet to rise above minuscule market share in the U.S. or worldwide. The implosion of BlackBerry was the best opportunity for Microsoft to grab share, but it has failed to do so. Microsoft must struggle to carve out a niche in what has become an iOS-Android world, or maybe an Apple-Google-Samsung world if Samsung and Google part company.

Missing apps. Furthermore, Windows Phone, now with more Nokia, still has the same old problem: The lack of an adequate app ecosystem. In software, Microsoft doesn’t get anything from Nokia that Windows phone didn’t already have (Nokia’s strongest mobile software asset, its maps business, is not part of the deal.) After three years, Windows Phone still lacks such table stakes apps as native YouTube and Instagram clients. Maybe a Herculean effort by Microsoft management could change this, but such an effort means other, probably more important things, are not going to be done.

The outlook in tablets is even bleaker. Windows RT, the version developed specifically for tablets, is a resounding flop and Windows 8 on tablets hasn’t faired much better.  Nokia reportedly has a Windows RT tablet ready to launch this fall; unless it is a lot better than the Surface or the Surface’s planned successor, it would just split a tiny market.

The iPhone has turned mobile phones, even business phones, into an overwhelmingly consumer business. This means the Nokia acquisition has plunged Microsoft far deeper into an area it really should be abandoning, Microsoft simply is not very good as a consumer company. And it is hard to see what Nokia, headed by a man whose greatest managerial success came as head of the Microsoft Business division, brings.

The Xbox problem. Xbox is Microsoft’s one consumer bright spot, but the chart above shows its fundamental weakness. Even putting aside the enormous sunk cost of Xbox and the fumbled launch of the Xbox One, the Entertainment & Devices segment is too small, especially in profit share, to make much of a difference. With little prospect for explosive growth in the game console-cum-set top box market, Xbox is not going to save Microsoft.

With whatever energy Microsoft management has left after coping the the challenges of the Nokia acquisition, the company should focus on what it does well, and that is to sell business software. That is a market that has been changing,  but here Microsoft has been adapting, converting its traditional sale of permanent software licenses into software-as-a-service and platform-as-a-service offering.

Windows sales will shrink with the PC market, but they aren’t going away and will remain highly profitable; a 50% operating margin for the Windows division in a crummy year is impressive. The urgent need is for Microsoft to develop a replacement for Windows 7 that businesses might want to buy–something with the under-the-hood improvements of Windows 8 but without either of its unloved user interfaces.

Reinforce success. The business software operations also deserve reinforcement. The big part of the tech commentariat that knows little or nothing about business software consistently underestimates the importance and staying  power of Office (I agree that Office is finished in consumer markets, but that was never its real business anyway.) Back-office tools such as Exchange, SharePoint, and SQL Server remain mighty money-makers and the Microsoft Dynamics suite of resource planning, customer relationship management, and accounting tools is growing nicely.

Web services, particularly those that serve business rather than those that are directly consumer-facing,  are another area of strength. While behind Google in many areas, Microsoft is well ahead of Apple, which often seems as clueless about Web services as it is savvy about devices. Azure, another service little-known to those who do not follow enterprise software, has made impressive gains the the platform-as-a-service business, though Microsoft should stop hurting itself by branding the product as Windows Azure. Windows has had a great run as a brand, but it is time to move on.

In the constantly mutating tech world, Microsoft cannot afford for its top management to take its eyes off these successful operations. But I fear that it will be hard to give these operations, which I think represent Microsoft’s best chances for future success, the attention they deserve while management is deeply distracted by the enormous challenges of Nokia. The $7 billion investment (including a patent licensing deal) was not a huge amount of money, but its ultimate cost to Microsoft could be a lot higher.

 

Steve Wildstrom

Steve Wildstrom is veteran technology reporter, writer, and analyst based in the Washington, D.C. area. He created and wrote BusinessWeek’s Technology & You column for 15 years. Since leaving BusinessWeek in the fall of 2009, he has written his own blog, Wildstrom on Tech and has contributed to corporate blogs, including those of Cisco and AMD and also consults for major technology companies.
  • Kenny

    Great Post Steve

    But i think Buying Nokia is a god business Strategy for Microsoft.

    Now we have Microsoft, Google, Apple competing on Hardware, Software , Service and Cloud for our hard dollars

    I’ve never been so excited

    • James King

      Microsoft refused to accept that it was in the operating system business, not the Windows business. It made the mistake in thinking people didn’t want to learn something new. Apple showed that people indeed don’t want to learn something new, they want software to operate in a fashion that is naturally intuitive. People don’t want to become experts in computing technology, they just want it to work.

      Microsoft never learned the difference between “changing” software as opposed to “improving” it. Windows became bigger and more cumbersome and then someone at Microsoft got the bright idea to take everything that sucked about Windows and cram it into every other device category possible.

      The sad thing is that, if Microsoft had actually improved Windows and created intuitive operating systems for other platforms, its licensing model would still be kicking. It was a pretty great system… OEMs shouldered all of the risk, Microsoft snatched all of the profits.

      In the end, Microsoft was “disrupted” in the consumer market simply because its products were not good enough. In the most significant ways, they still aren’t.

  • Erratum.
    “if Samsung and Google part company”
    when, not if

  • aardman

    I thought the problem with Win Phone is the design of the OS not the (lack of) integration with the hardware. This acquisition doesn’t solve Win Phone’s problems.

  • FalKirk

    — “By purchasing Nokia’s device business for about $5 billion, Microsoft has just reinforced failure in a big way.”

    — “At a time when Microsoft should be turning its attention to its successful core businesses to build for the future, it is redoubling its efforts in an area where it is struggling, at best.”

    Couldn’t agree more. Microsoft’s mobile strategy is all wrong. Ballmer was leaving. Now is the time for a new CEO and a fresh approach.

    Instead, Microsoft double-downs on phones. They’re like a gambler that’s deep in the hole but can’t stop themselves from losing more and ever more as they vainly attempt to recover their losses.

    • rationalchrist

      Somehow, a company that is destined to doom always finds ways to fail. No matter how obvious the stupidity of its chosen action, how much better the alternatives, the company always chose the most direct route to the failure. Microsoft is one of such companies.

    • qka

      This deal didn’t happen overnight. Nor could it have happened without the BoD’s knowledge and approval.

      It will be Ballmer’s final, fatal act. (Unless he has something equally ill conceived waiting to be unveiled.) It will also be an albatross around the neck of the Board for years to come.

      • FalKirk

        “Nor could it have happened without the BoD’s knowledge and approval.”

        Agreed. It now appears obvious that removing Ballmer wasn’t a change in direction, it was an attempt to ACCELERATE current direction.

    • Kenny

      you guys make it sounds as is the computer, Smartphone and tablet business was a done deal

      i remember Apple been in a similar spot in 1997 in the PC industry against Microsoft, and what happen after that hum

      i’ll let you guess

      • TheEternalEmperor

        The reason people keep bring up Apple is because Apple’s rise was an anomaly and basically, hoping that a “Steve Jobs” clone backed by a “Johnny Ives” spiritual partner will swoop in and save the day seems like a risky business strategy.

      • FalKirk

        Kenny, the recovery of Apple was the greatest corporate comeback of all time. Thinking it will happen again is like thinking that a team can come back from a 3-0 deficit in the Stanley Cup Finals. It CAN happen – it just almost never DOES happen.

        • Kenny

          Microsoft doesn’t need a similar comeback a la Apple because they are in a much much better position than Apple was.

          they just need to reinvent the mobile industry and become a major player that can compete with Apple and Google on any segment for our hard earn money.

          Ballmer with all his Bluntness has anyway been very successful at creating a $ 20 billion business in the server and tools industry from Microsoft that people rarely talk about.

          Besides
          Microsoft is a major player in the cloud, which is where i believe that the mobile industry are heading

          • FalKirk

            “(Microsoft) just need to reinvent the mobile industry and become a major player that can compete with Apple and Google on any segment for our hard earn money”

            Is that “all” they need to do? They’re all set then. /s

        • True. Not many aside from fanatics like myself believed Apple could be relevant again, and that was in our wildest dreams as we supported the company thru a period where, quite frankly, they were not entirely worthy of that support. As far the industry was concerned, the die was cast and Apple’s death was inevitable.

          Now that Apple under Jobs accomplished what almost all of punditry believed was impossible, and accomplished it in a most spectacular fashion, much of punditry is now convinced that such a turnaround is par for the course, based on a sample of one.

    • I agree. Microsoft is on the right path to its end. Every move Steve Ballmer makes within his last 12 months at the helm of Microsoft will lead the company more and more to a field in which it lost every battle it has faced the last 13 years. Microsfot is a company that works well with other companies, but not with individuals, or the consumer market; there, Microsfot is lost, but it insists again and again to achieve success right here, where it has experienced only failure.

      In my humble opinion, this can not be anything more than the stubborn obstination of Steve Ballmer, a man who has failed time and again since he assumed the leadership in the most powerful company in the late 20th century. Under Bill Gates, Microsoft accumulated such much power and so much money that even the U.S. government saw it as a threat, not only to other technological companies but to any company that got in its way, which is no a small thing. But with Steve Ballmer, things were completely the opposite. Ballmer’s errors were undermining Microsoft more and more, until the time came when it ceased to be the dreaded company that was with Gates, and began the endless falling, straight to insignificance.

      It is true that during Ballmer’s reign, the profits tripled in some cases, but the company ceased to be viewed with more fear than respect. What should have been perceived as enthusiasm and attachment to the company that made him immensely rich, ended up being seen as clumsy and messy Ballmer presentations at developer conferences. The bad nickname of “Ballmer the Clown” is the sad legacy of those appearances.

      No one doubts that Steve Ballmer loves Microsoft, but it is a fact that he never accepted the advice of anyone but Bill Gates, and when Gates was no longer by his side to help him to run the company, Ballmer was overwhelmed by a world he never belonged, then lost contact with reality and began to make the worst decisions, harmful even for a company as large and as powerful as it was Microsoft.

      In the real world, mistakes are paid at very high prices, and Microsoft is no exception, so we better prepare ourselves to see how much Microsoft will pay for the mistake of holding against all odds to a man who never knew what to do with so much power.

  • Neil

    Excellent article Steve. Some examples.

    Since Office now pretty much requires a subscription, why no iPad version that puts Pages to shame?

    Why does SharePoint, SQL Server, etc. require so much training to learn? Improve the user interface to expand them into the SMB market.

    Microsoft is losing the web development game to Python, Rails, and others.

    I could go on but whatever.

  • Rene Stein

    One look at those charts tells me that Microsoft is still a very successful company, and will continue to be a very successful company for a long time, in the enterprise market.

    When Bill Gates ran Microsoft, he wanted to be seen as the technology visionary for society. I think he honestly wanted to invent the future. He was never successful at it, but he tried. This acquisition shows just how irrelevant Microsoft is when it comes to inventing the future now. They are trying to play catch up 5 years late, well 6 or more by the time the deal is actually completed.

    I remember Steve Jobs saying something to the effect that it was over, Microsoft had won, it was time to move on to the next great thing. I don’t see Microsoft doing this.

    One exception, if Microsoft can do something spectacular in the $30 to $50 phone space, something minimally profitable, they could become a major player.

    • Neil

      Except for a couple of years, the Mac business was always profitable. It’s just that Steve Jobs realized Macs would never gain significant market share. Apple continued that business but also created new businesses.

      By contrast, Windows Phone has never made a dime. And Microsoft always wants to to go head to head. Always. “We need to compete with Google in search. We need to compete with Apple in smartphones and tablets. We need to compete with Sony in game consoles.” Etc. This approach used to work when its rivals were tiny. But its current rivals are wealthy and moving fast. Microsoft doesn’t seem to know how to create new product categories despite all its research and development spending.

  • DarwinPhish

    Though probably not the best decision, this purchase is understandable. Nokia is really the only Windows Phone manufacturer left. If Microsoft wants to keep moving forward with Windows Phone, they need Nokia. Without this deal, Nokia was probably going to go broke very soon (it’s noteworthy that the deal includes about $2 billion in financing), or would, as other hoped/speculated, dump Windows Phone and move on to something else. I liked the military quote you gave, but more appropriate quote might be, “in for a penny, in for a pound”.

    All that said, the better decision may have been to let Windows Phone die, but it seems clear that is not Microsoft’s thinking.

    • steve_wildstrom

      What I am saying is that Microsoft shouldn’t keep moving forward with Windows Phone. They should have cut their losses and invest in what they can do well.

      The military adage doesn’t always hold. There are times when you must reinforce failure to prevent catastrophe. But this isn’t one of them (yet.) Meanwhile, “in for a penny in for a pound” is not a rule followed by any smart gambler. It’s a way to accelerate your losses.

      • DarwinPhish

        I agree. But its important to recognize that the mistake is not buying Nokia, but sticking with Windows Phone

  • I love the opening statement “reinforce success don’t reinforce failure” because I think it opens up the entire, er, vista of Microsoft’s future. Ballmer notoriously reinforced success — tying everything to Windows, and reinforced failure — by following Google and Apple.

    • Space Gorilla

      Seems that Google and Microsoft are moving towards vertical integration, to some degree anyway. In the new era of consumer-facing mobile computing it certainly helps to own the entire stack (Samsung has to be the next one to make this move), but Apple is the only company with decades of experience doing this, and the only company with true ownership of the entire stack and not a single missing piece. Could Apple improve certain things? Sure. But they’ve got all the pieces. I’ve said this before, but I find it fascinating that there’s only one company where I can get all my computing needs taken care of, from desktop to pocket, all quality products and great support. I can walk into an Apple Store and walk out with a full range of gear. Something else I’ve said many times, you think Apple is big now? Wait five years. Apple = convenience and consumers love convenience.

      • I think that perfectly encapsulates Apple’s long-term advantage (and again reveals some of the “Apple doomed” nonsense. As you say:
        “there’s only one company where I can get all my computing needs taken care of, from desktop to pocket, all quality products and great support”

    • Peter Buckton

      The problem with reinforcing success, is that the corollary military maxim is almost always forgotten…
      Reinforce success – when (and only if) it supports the core strategy.
      WWI is the consummate case study of pouring more and more men and resources into battles that would ultimately go nowhere. Winning a battle that wins you nothing except a devastated wasteland, is actually a defeat.
      Buying Nokia, is buying a wasteland (particularly as they are not selling the good stuff).
      And even if MS had alternatively put those resources into another division, unless that supported a clear, cogent and coherent strategy, then they are merely continuing a trend they have established for some time. They don’t really have a game plan, or know where they are going. And what they are doing is warped by wishful thinking. A new CEO will have to set a distinctly different agenda and strategy, and s/he will have to be resolutely backed by the board.
      Charging an opening, because it is an opening, can just as easily be a trap.
      Sometimes you do have to double down on the your losses, because that is the objective that must be taken. If you get it right you are a hero, get it wrong and you are a chump.
      (and ideally you would be paid your super sized executive salary AFTER history has pronounced on your success…)

  • soyroberto

    New Logo, new CEO, new division and 30,000 new employees, why obsessed about being everything for everyone? God forbids Elop becomes CEO, he would just destroy the company I once worked at

  • Walt French

    I think buying Nokia was not a strategic blunder, but merely exposes a very dubious strategy that now seems to have been Microsoft’s strategy for years now, and has pretty consistently failed: leverage the (wildly successful) Gates “Windows on every desktop” vision into “Windows Everywhere!”

    But the company has not shown the creative spark that’d allow that vision to be realized. Once Google made the price of an OS approximately $0.00, Microsoft was cut off from all the hardware OEMs. The royalty payments, whatever they are, are still less than what Microsoft needs to get to sustain its software revenue model.

    So, Plan B, cut out the OEM middlemen, which resulted in another thudding failure. Nobody particularly disputes the neat engineering of the Surface (well, maybe the RT), but it was a machine with no vision of what a customer would do, rather, how it would revive the moribund (died in 2007, maybe 2010) mobile extension of Windows.

    So this is actually Plan B+, abandoning the hope of independent hardware partners (who have nowhere to go on the desktop but will have awakened about sleeping near elephants) and capturing Nokia. Trouble is, we are moving into the absolute commoditization of hardware, just as transistor radios first showed up in the 60s from Sony and then from a thousand firms you never heard of, each executing on a trivial variation on a rather standard design, and appearing/disappearing on a moment’s notice. Nokia has lost the third world markets just as surely as it has lost the advanced markets; this move only staves off the grim reaper a couple of years.

    And again, does nothing to bolster the supposed strategic vision of Enterprise laying down with the Consumer in a Peaceable Kingdom of Microsoftdom.

    I think the genie’s out of the bottle. We have a burgeoning startup culture — software & services in the US; the above plus hardware in Asia — that is happy to try to capture a few pennies on any device they can. Ultimately, I think the VCs abandon and starve out a lot of the craziness, but how Microsoft hopes to execute what appears to be a “strategy” is beyond me.

    • jfutral

      “Once Google made the price of an OS approximately $0.00, Microsoft was cut off from all the hardware OEMs.”

      I may be wrong, but I don’t think it was quite that simple. I think a large part of that shift was also due to what was spoken about in the “Irony…” article. Android quickly became a Touch UI OS, thus the available alternative to iOS for OEMs, pdq. (Sorry, had to throw in one more to add to the alphabet soup.) Interestingly, BlackBerry actually saw an increase in sales after the iPhone. It wasn’t until Android took hold that BBRY started losing sales, IIRC.

      And this is where I disagree with the “Irony…” article. I think MS’s loss is no irony at all. They did not see the importance of the mobile market as it exists today, they saw a completely different subjugated relationship of mobile to desktop. They got it backwards in a way only MS would and would have wanted it to be. Even back then a BlackBerry was not intended to be a substitute for a PC, only an extension or add on. That is as important as MS ever believed mobile to be. Remember laptops for a long time were never thought of as being powerful enough to be a PC on their own, it was just a mobile tag along of the desktop.

      Joe

  • Mauryan

    MS might have purchased Nokia probably because Nokia might have looked for an alternative OS in addition to the Windows based OS. Every company wants to have more than one vendor to keep the resources available to them. If Nokia went the Android way and if by any chance the Android phones did better than the Windows phones, MS would have had egg on its face. Therefore it could have been a strategic move to gobble up Nokia before that shameful possibility could arise. And Elop could have been bought out with a promise of heading MS one day.

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