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  (Source: Bloomberg)
Let's examine two views on this controversial, provocative union

Microsoft Corp. (MSFT) late Monday announced its intention to purchase Nokia Oyj. (HEX:NOK1V) sending shockwaves through the OEM space.  Whether this is a match made in heaven or hell remains to be seen, but one thing's for sure -- these two companies were already closely tied so this relationship is not exactly new.

With that in mind, I'd like to present two schools of thought on the merger.

I. Windows Phone, the Winner

Key points:

Devices Let's assume for a minute that Nokia continues its current Windows Phone sales growth.  That seems reasonable given that its Q2 bump was before its most impressive Windows Phone to date -- the Lumia 1020 -- even landed.  With a Nokia-crafted "Surface Phone", sales could leap even faster.

Nokia Lumia 1020

The Surface and Nokia's Lumia devices mesh well together -- both share similar bright, colorful style cues and some common elements in terms of hardware.  A single branding -- either "Surface" or "Lumia" -- could reduce confusion and sell consumers on an ecosystem/look similar to Apple's iOS products.

Currently the only OEMs growing faster than Nokia are Lenovo Group, Ltd. (HKG:0992), Samsung Electronics Comp., Ltd. (KSC:005930), and LG Electronics, Inc. (KSC:066570).  Samsung is predicting a Q3 sales slump, so Nokia could soon find itself in the top three in market growth.

Google Inc. (GOOG) and its subsidiary Motorola have shown that a platform provider can use a hardware-making subsidiary to lead by example and encourage other OEMs to step up their game.  Likewise Nokia, if properly managed could actually encourage other prospective Windows Phone makers like Acer Inc. (TPE:2357) to push out high-end Windows Phones.

Windows Phone marketplace
Windows Phone is the fastest growing mobile platform. [Image Source: WinSource]

In a way the Nokia-Microsoft union is superior to the Motorola-Google union as Nokia has already independently undergone its own restructuring, so Microsoft won't have to alter the unit as drastically as Google had to with Motorola.

Finally, Stephen Elop could play a key role in Microsoft's leadership team.  The former Microsoft Canada executive has had his share of ups an downs as Nokia's chief, but he has ultimately revamped his company into a leaner, growing competitor.  That kind of reimagination seems like it could be a boon to Microsoft amidst its "devices and services" push.  With CEO Steve Ballmer departing, Mr. Elop provides the kind of veteran leadership Microsoft is short on.

II. Losers Flock Together

Key points:

  • Microsoft's desktop companion to Windows Phone, Windows 8, has missed badly
  • Both companies have suffered recent declines in sales, relevance

  • Nokia has been slow to deliver on devices -- a major reason why Windows Phone failed to take off early
  • OEMs could run from the Windows Phone platform at the first hint of Nokia brand favoritism
  • What ifs -- Nokia could have done better sticking with Symbian or switching to being a premium Android OEM
A second perspective would be to look at this merger as a union of two failing firms.  While Nokia's Windows Phone sales are "growing", they still remain less than half of the Symbian smartphones it sold in 2011.  Likewise Microsoft is suffering the worst percentage drop in PC sales in history.

Ballmer fed up
Nokia and Microsoft have both struggled, seeing a net decline in sales from their peek levels.

The problem with Nokia, image-wise, from an investor's perspective is that it will never be able to lay to rest the "what ifs".  While 2011-era Symbian was losing sales and looked dated, if Nokia had opted to aggressively overall its own platform -- or opted to jump to a mature Android en masse, there's no telling how its sales might be different today.  BlackBerry Ltd. (TSE:BB) has certainly presented a cautionary tale regarding first party OS development by smaller firms, but perhaps Nokia could have found a way to deliver better with Symbian.

The Motorola-Google tieup, viewed in a different light, could offer some concerns for Microsoft-Nokia.  In the wake of its pairing with Motorola Mobility, Google has seen slow sales.  

Nokia Elop
Nokia might have suffered less of a fall, had it gone with Android.

Combine that with OEMs' vocal fears about Microsoft's Surface, and you could see Nokia's recovery slowing, while competitor OEMs to Nokia are driven away from the Windows Phone ship.

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By Solandri on 9/3/2013 7:16:20 PM , Rating: 2
If you look at the iPhone, you have Apple who controls basically the entire ecosystem. They design the OS. They design the phone. They have been very successful with that degree of control over their phones and tablets.

Thing is, that's a losing strategy. It is exceedingly difficult to know ahead of time what will succeed in the market. The companies that that field successful products weren't prescient nor did they have some genius insight into the market which told them exactly what to make. They just had a belief that a certain type of product would be better, and they happened to be right.

The way it works is that dozens if not hundreds of companies field products, each slightly different, each made according to what each particular company thinks will work. The successful ones are simply the ones which the buyers like. The rest don't sell in sufficient numbers and drop out of the market. It's the shotgun approach - all the companies throw a lot of different products out there and see which ones stick. Then they all look at the ones which stuck, evaluate why that product worked while theirs failed, and try to further refine their product to improve upon the successful product. (Which is why the current trend of trying to thwart copycats by suing them for patent infringement is very bad - it destroys the fundamental mechanism which drives the market.)

Occasionally this gets distorted by market inertia (people "trust" the brand - Apple in the 2000s, Sony in the 1970s, IBM before then) or good marketing (Monster cables). Sometimes a company gets lucky with several consecutive successes. But long-term it's mostly a matter of luck who is successful - your best guess as to what the market wants matching what the market actually wants is like winning the lottery. People may try to claim that they knew it all along after the fact, they may even believe it. But it's always just a guess. You're never sure until the product hits the store shelves.

Microsoft was successful by making a simple product which bridged software to hardware. Companies were free to experiment with different software products, other companies were free to experiment with different hardware products. By luck and inertia Microsoft found themselves in a position where people needed to buy their OS to marry the software with the hardware. That was their gravy train, and it's served them well for 30+ years.

If they want to get off that train and start limiting their product to a single software and single hardware solution both made in-house because they think it will expand their market appeal, well good luck to them.

By flyingpants1 on 9/4/2013 12:53:49 AM , Rating: 2
Most companies in this market make the exact copies of eachothers' stuff over and over again, often badly, and then wonder why they don't sell.

Your bit about not being able to know for certain what the market will do, or being able to prove you knew after the fact, is nonsense. Of course there are ways to guess what will work, somewhat reliably. Market research is just one of them. Some do it better than others. Luck is certainly a huge factor, but capitalism is a game of skill.

"My sex life is pretty good" -- Steve Jobs' random musings during the 2010 D8 conference

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