Can the Nokia Deal Save Microsoft?
Microsoft's recent deal with Nokia will put Windows Phone 7 on millions of Nokia mobile phones around the world. Microsoft in turn will shower billions of dollars on Nokia in marketing, engineering and other costs. The companies hope that together, they can make inroads into the mobile market that has increasingly become dominated by Apple's iPhone and Google's Android. Some people have argued that combining the forces of two companies that have been failing in the mobile market will add up to little more than failure times two. But the deal may well save Microsoft from a slow-growth future. The partnership is one of the most important that Microsoft has made in recent years -- so important, in fact, that the billions of dollars it's spending may well save the company and ensure that its technology remains relevant, and its products stay viable, well into the fast-changing mobile future.
You could easily argue, of course, that Microsoft doesn't really need saving. After all, in its most recent earnings statement, for the second quarter of its fiscal year, Microsoft reported that it took in $19.95 billion -- the highest revenue ever for that quarter. Net income was a healthy $6.63 billion. That doesn't sound like a company in need of saving.
But a closer look at the numbers shows that the revenue was bolstered primarily by yesterday's technologies, not tomorrow's. Leading the way was Office, with revenue growth of 24%, "a huge quarter, exceeding everyone's expectations" according to Kevin Turner, Microsoft 's chief operating officer. Sales for mobile and Windows Phone 7 weren't even broken out, a clear sign they were lagging. And reports that came out after the earnings report confirmed Windows Phone 7's problems with gaining traction -- only 500,000 Windows Phone 7 devices were shipped for the entire month of December , and those were to retail stores, not to consumers. By way of contrast, Google says it activates 300,000 Android devices every day.
It's true that without having a successful mobile operating system, Microsoft will still survive. Windows isn't going away anytime soon. Nor is Microsoft Office, server technologies and other successful core products.
But none of those technologies are high-growth. If Microsoft relies solely on them, it will eventually become the tech equivalent of a utility company, reaping profits primarily by providing underlying infrastructure. The best engineers, designers, marketers and other creative professionals will look elsewhere for work, leading to a further spiral downward.
In a future that belongs to mobile, Microsoft would not be able to maintain high growth without Windows Phone 7 becoming a success. That's why the Nokia deal is so important to Microsoft. With a single contract, Microsoft ensures that it will become an important mobile player, not the afterthought it is now. Although Nokia no longer holds a dominant presence in the mobile market -- where it once had more than 50% market share -- even in its weakened state, it has a 29% market share, according to Gartner.
Without the Nokia deal, it was unlikely that Windows Phone 7 would ever gain traction. Even after its well-publicized launch this fall, it didn't make up any ground against the iPhone or Android. Every week, it's been falling further behind.
Several billion dollars may sound like a sizable bet for a company to make on a single contract, but in Microsoft's case, it was justified -- it's not just betting on a technology, but on its own future. By itself, Microsoft has shown it can't survive in mobile. With Nokia, it at least has a chance of success. The deal may be the best several billion dollars the company ever spent.
Preston Gralla is a contributing editor for Computerworld.com and the author of more than 35 books, including How the Internet Works (Que, 2006).
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