Should Microsoft buy Nokia? The pros and cons

Can a company succeed at selling smartphones and tablets without owning the software and the hardware?

A hot-button question lately in the rapidly-growing smartphone market: Can a company succeed at selling smartphones and tablets without owning the software and the hardware?

Judging from the top players in the market Apple, Google -- which last week bought Motorola Mobility for its hardware and patents for $12.5 billion -- and RIM, the answer seems to be no, you really can't.

Yet, during the past two years Google's Android OS has exploded in popularity to become the number one smartphone OS. It currently owns 40 percent of the U.S. smartphone market, according to market tracker comScore. Yet Google did all this without owning any hardware. Knowing that this growth probably won't last forever, Google took matters into its own hands and bought Motorola Mobility.

Although the smartphone market has expanded like wildfire, the market share for Microsoft's Windows Phone 7 OS remains tiny. In the U.S., Windows Phone 7 market share is down to 5.8 percent as of June 2011, according to comScore.

So what is Microsoft to do? Continue its long, storied history of licensing software to hardware partners -- which has clearly worked well in the PC space? Or do as others have done and buy a phone maker? The likely acquisition target is Nokia, and the two companies already have a "collaboration agreement" that will have Nokia running Windows software on all its phones starting later this year.

Industry analysts are divided on whether Microsoft should take the plunge and buy Nokia or continue its partnership and license WP7 to other hardware makers like Samsung and HTC.

Here are some pros and cons to Microsoft buying Nokia.

Why Microsoft Should Buy Nokia

One reason Microsoft should make a bid for Nokia is to prevent someone else from buying it. Nokia's share price has plummeted in the last few years and is now sitting around $6, its lowest point since 1998. All of which makes the Finnish company a relatively cheap and attractive buy.

If another company (say, Apple or Google) stepped in to acquire Nokia, the new owner would surely undo the Windows Phone 7 deal, which would be a devastating blow to Microsoft. And if Microsoft bought Nokia, the deal would force the Finnish company to stay loyal to its new owner.

In addition to questionable loyalty, there's also no guarantee that the struggling Nokia will innovate if Microsoft is merely a partner.

Veteran tech analyst Tim Bajarin stresses in a recent blog post that Microsoft will never have innovative smartphone hardware if it is just a partner. It must own hardware to control hardware innovation, he says.

"Microsoft clearly wants Windows Phone 7 to become a worldwide hit and at this moment, Nokia is just another distributor of Windows Phone 7 in the same way HTC and others are," writes Bajarin.

"But if Microsoft's decides to keep its OS as a pure licensed property and trust the hardware partners to innovate on their own, that boat has sailed. Microsoft too will come to the conclusion that if they want Windows Phone 7 to be the third major alternative to Apple's iOS and Google's Android, they will need to own the hardware as well as the software and services."

Why Microsoft Should Not Buy Nokia

On the flip side, it may be wiser for Microsoft to stick with its Nokia "collaboration agreement." Why? Because Microsoft cannot afford to alienate its phone-maker partners the way that Google could.

It have looked to its other mobile partners like Microsoft was playing favorites when a special deal with Nokia was announced. But then Google acquired Motorola Mobility and made Microsoft look altruistic in comparison.

Microsoft has relied on, excelled at and profited from hardware-partner relationships in the PC space. The smartphone space is much different - Microsoft's market share is much lower, and there are fewer partners and more stiff competition. But still, buying Nokia would disturb important mobile partner relationships with HTC, Samsung and LG, and Microsoft just isn't in a position to do that, writes veteran Microsoft watcher and ZDNet blogger Ed Bott in a recent blog post.

Furthermore, Microsoft gets a heck of a lot of value from its existing partnership with Nokia. Despite its falling stock price and minuscule market share in the U.S., Nokia still has huge worldwide reach, which will allow Windows Phone 7 to scale quickly worldwide.

"Make no mistake about it: Nokia is huge," writes Bott. "Its share of the worldwide smartphone market is larger than any competitor -- five times larger than Motorola, for which Google is about to pay $12.5 billion."

And then there are the patents. Part of Microsoft's deal with Nokia is a cross-licensing agreement. Microsoft has access to Nokia's patents (for which Microsoft spent roughly a billion dollars), and Nokia in turn will be licensing Microsoft's patents. One of the main reasons Google bought Motorola was for its patents.

"Given the depth of that relationship, what could possibly motivate Microsoft to buy Nokia?" Bott writes. "What else would they get except the management headache of running a very large company and anger from their existing partners? Nothing."

Shane O'Neill covers Microsoft, Windows, Operating Systems, Productivity Apps and Online Services for CIO.com. Follow Shane on Twitter @smoneill. Follow everything from CIO.com on Twitter @CIOonline and on Facebook. Email Shane at soneill@cio.com

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Tags business issuesMicrosoftNokiaMergers and acquisitions

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Shane O'Neill

CIO (US)

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