Why Microsoft Should Buy HTC Not Nokia

Ben Bajarin / August 26th, 2011

I don’t want to be in the predictions business. I like being in the industry analysis business. However to be an effective analyst and in particular focus on industry trends like my firm does we need to not only analyze the current markets but what the future markets may look like as well. Sometimes we are lucky enough to have some of our forward thinking analysis come true.

When I wrote the column on why Google Should buy Motorola two weeks ago, it was part of my own internal excersise to anticipate possible scenarios based on which companies are more valuable competitively together rather than alone. We do this often because we do a great deal of competitive analysis.

As I stated in my Techland column last weekend, the industry has changed. With the announcment of the Google / Moto deal and the HP PC division spinoff, companies will be forced to opperate very differently if they want to compete and stay relevant.

It is inevitable at this point that we see more large company acquistions or mergers and/or more companies exit certain business’ to focus on more profitable ones.

As I stated above, some companies are more valuable and competitive together rather than alone.

Many believe that Microsoft should buy Nokia, including our president and my father Tim Bajarin. It is hard to argue with his logic or his historic background in the technology industry. In his article on the subject, he pointed out that a vertically integrated Microsoft and Nokia would have a better chance of competing with Apple and Google/Motorola in the future.

I can certainly see Microsoft buying Nokia, but if I was Microsoft I would buy HTC.

HTC Needs More Than Hardware

I’ve stated almost everywhere I write and give keynotes that making money on hardware alone in consumer markets is extremely difficult. If you don’t have proprietary value to add to your hardware to differentiate yourself in the market and drive extra revenue, then you have a rough road ahead.

HTC has always taken this approach and understands this. The problem is their software partners Microsoft and Google don’t want them customizing their software and makes it increasingly difficult for HTC to do so. I don’t see this changing anytime soon.

This is why many in the media have rightly made the point that HTC could benefit greatly from webOS. I completely agree, however it is yet to be seen whether webOS gets spun off with the hardware business. If it doesn’t then one strategy would be for HTC to license it, but again the question of differentiation will come up.

Microsft Needs More Than Software
I believe the trend to verticalization in this industry is real and signficant. The fact of the matter is optimizing software for hardware is a challenging task when an OS is licensed. Steve Wildstrom points out in this article the challenge with open(licensable) operating systems. Apple accomplishes this better than anyone because of their control of the hardware, software and services related to the Apple ecosystem. Apple’s model is closed but it is also a complete holistic ecosystem. And it is obviously working.

Microsoft has two of those three elements and if they want to control their own destiny they need to either enforce much more strict requirements of hardware or they need to own a hardware business for smart phones, tablets and possibly more.

I don’t think enforcing more hardware restrictions is the right path because it doesn’t allow for differention. Microsoft with Windows Phone and Google with Android are not positioned to help their partners differentiate. This is a strategy that will suffocate hardware only players.

The bottom line is that in the future consumers will gravitate more toward ecosystems rather than products. That ecosystem will consist of hardware, software and services.

Companies who orient themselves to build products will have very little consumer loyalty in future product decisions. Companies who build ecosystems will find more loyal customers year after year. In this column I point out why some ecosystems are more sticky than others.

HTC and Microsoft could together become a very powerful global player in mobility. HTC makes great hardware and has some excellent software expertise as well. Both benefit Microsoft greatly.

Competing with Apple is for many companies the worst thing to try and do. However if Microsoft bought HTC I would argue that together they have the best shot.

Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio
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