Microsoft plunges into mobile war, Google exits

When Microsoft announced in September that it was buying Nokia's struggling handset business and would meld its Windows operating system with the devices, it offered two major reasons for the $7.2 billion deal:

- Apple and Google were combining their software and hardware.

- The deal would ensure the survival of Microsoft's Windows operating system in a mobile universe.

That was then. Last month, Google threw in the towel on its foray into handsets, selling its Motorola Mobility division to Lenovo of China for $2.91 billion.

And this week, The Wall Street Journal reported that Nokia would offer a version of Android, Google's operating system, on a line of smartphones aimed at emerging markets.

So much for Microsoft's rationale. Satya Nadella, Microsoft's incoming chief executive, faces some urgent questions: Does the Nokia deal still make sense? And how does Microsoft expect to survive, let alone prosper, in a cutthroat hardware market where Google is giving up?


The basic problem for Microsoft is that most consumers have chosen an operating system.

"Google has won," said Nicholas Economides, an economics professor at the Stern School of Business of New York University and a visiting professor at the University of California, Berkeley who specializes in network economics and electronic commerce. "We're in a world where the biggest market share by far is Android. And the second-biggest is Apple. Then, way behind, is Microsoft. What's in this game for Microsoft?"

From Microsoft's perspective, the answer may be that it is in a different war -- one that isn't over handsets or even the operating systems embedded in them, but the ecosystem of applications and services that sit on top of them. And if that's the case, Microsoft had little choice but to double down on Nokia and its handsets, since the alternative would be worse.

In an email to Microsoft employees on February 4, his first day as chief executive, Nadella said, "Our job is to ensure that Microsoft thrives in a mobile and cloud-first world."

It's hard to imagine how Microsoft could be "mobile and cloud-first" without mobile.

Microsoft's "objective is to get to the point where Windows phones would be able to use Microsoft software and applications for PCs and tablets," Economides said. "If they can get there, that would be a huge win. They could leverage all their applications and be a formidable competitor. But they're not there. Saying that's the objective doesn't mean it will happen."

Kirk Materne, an analyst at Evercore Partners who covers Microsoft, agreed that the company had little choice. "It was a fairly low-risk way for Microsoft to dip its toe into the market and try to extend Windows' relevance," he said. "It's not going to be pretty. They're already running uphill. But investors have very low expectations. If Microsoft can regain any momentum, it's all upside for them."

With $83 billion in cash on its balance sheet, Microsoft's investment in Nokia is relatively modest.

Still, for Microsoft or Lenovo or any other hardware maker trying to grab market share, the trends are ominous: In a global market once dominated by Nokia and BlackBerry, both are struggling for survival. Nokia's market share in 2013 dropped 25%, to 13.8%, and BlackBerry's was just 1.9%, according to the research firm IDC.