For technology enthusiasts, the mobile industry is a fascinating vertical to observe. Even in my relatively few years covering consumer electronics, I’ve already seen Microsoft go from ruling the smartphone space (briefly, and after an even briefer era of Palm dominance), to the unenviable position of (albeit well-funded) underdog — forced to claw its way back into relevance in an ecosystem now ruled by players — Google, Apple — who didn’t even have a mobile footprint a decade ago. Just yesterday we heard that Windows Phone, scrappy successor to the once-beloved Windows Mobile, has made significant strides in the Latin American market, and the most recent IDC numbers show increased adoption worldwide.
Microsoft is slowly succeeding in its quest for a return to mobile relevance, but the victory is coming at a price: its mobile fortunes are now inescapably tied to those of its leading OEM, proud, storied, Finnish manufacturer Nokia. Without Nokia, Windows Phone may not have even survived long enough to begin hitting its stride.
What do you do as a business with essentially one customer, a monopsony? For it’s the OEMs who license its platform, and not the end user, that are Microsoft’s real customer base. In the desktop space, the Windows vendor has historically enjoyed wide interest among computer makers, engendering a rich, disparate ecosystem of hardware. But in the unfriendly, hyper-competitive wireless market, Redmond has but three main partners, and even two of those — HTC, Samsung — only see a small fraction of the Windows Phone sales earned by Nokia.
If Nokia suddenly decided to change course, adopting Android (as I once jumped on the bandwagon and suggested), Tizen, or even resuscitating a homegrown platform like Maemo/MeeGo, Microsoft would be in a world of hurt. It would essentially need to find another partner as capable as Nokia — unlikely, in today’s landscape — or embark on the risky, complicated path of building and marketing its own handsets.
The answer to the above question seems clear, then: a large business which has become overwhelmingly dependent on a single, smaller customer (and which does not interact directly with end users) must consider buying that customer outright, ensuring a continuity of demand for its wares, and hopefully tapping into some institutional efficiencies that drive down costs. As the argument goes, Microsoft must swallow up Nokia if it wants to put control of its fate back into its own hands.
And in fact, all indications are that Microsoft has attempted this very acquisition on at least one occasion, targeting Nokia’s handset division specifically (Nokia continues to find success in non-consumer-facing, B2B telecom infrastructure). And by all accounts, it was the relatively restrictive terms on a potential buyout dictated by Nokia that proved to be the sticking point, suggesting that the balance of power between the two companies seems to favor the Finnish OEM. In other words, Redmond needs Espoo more than Espoo needs Redmond.
If things did in fact play out this way, it does not bode well for Microsoft’s hopes of a future acquisition; to wit, Nokia will presumably grow even stronger as Windows Phone adoption (read: Nokia handset purchases) increases. On the plus side, most Nokia fans would prefer an independent company to one that has essentially became a hardware subsidiary for Microsoft, so a continuation of the status quo will probably be just fine for many mobile lovers. However, I wouldn’t be surprised to see Microsoft offer a similarly sweet licensing deal to yet another OEM (Huawei, perhaps?) in the pursuit of diversifying what is now a relatively limited selection of handsets.