Microsoft's Mobile Strategy - Shrewd, Desperate or Just Plain Stupid
If the announcements made this week by Microsoft and Nokia were any indication of the Mobile Strategy at Microsoft, then like you, I am scratching my head trying to determine if this was shrewd, desperate or just plain stupid.
First, Microsoft announced a number of new OEM partners for Windows Phone including Lenovo, LG, Foxconn and others.
Then Nokia announced their strategy for the next billion devices and it encompassed two new ASHA ultra-low end devices and three new Android devices that would utilize Microsoft services like Outlook.com, OneDrive and Skype called the X line.
So what's going on here ?
First let's take a look at where Windows Phone sits in the market place today. It's hard to believe, but Windows Phone (WP) is now 3.5 years old and it's success has been very mixed.
Worldwide, WP holds about a 3.7% market share - a very distant 3rd to Android and iPhone. For example here in the US, Windows Phone holds about a 5% market share according to the Kantar WorldPanel ComTech reports with Android at 54.8% and iPhone at 38.9%.
In Europe it is a very different story. Since Nokia has a much better reputation in many EU countries, WP had done quite well - for example Italy where WP holds a 17.5% market share with Android at 67.3% and iPhone at 12.6%. There are similar share results in several EU countries as well as Great Britain.
But in China, the largest market in the world, WP has failed miserably. WP holds only a 0.7% share, Android is 80.9% and iPhone at 17.9%.
Now let's look at Nokia. Nokia is world's 2nd largest phone vendor with a 15.7% Worldwide market share according to IDC. Samsung is first with a 27.7% market share. The challenge for Nokia however is that in the last year their overall market share has dropped from 22.5% while Samsung, Apple, LG and others have seen growth. In fact prior to the Microsoft and Nokia partnership around Windows Phone, Nokia was the world's largest handset vendor at some 35% worldwide market share.
A major contributor to the market share drop has been the movement from feature phones to smartphones. Nokia had very popular lines of ASHA and Symbian based devices that sold well worldwide. But in 2011 MS and Nokia made an announcement that Nokia's Primary Smartphone OS would be WP. Since then folks who have been moving to Smartphones, have moved away from Nokia. And while Nokia was able to see good sales with the low cost 520 and 620 WP models, it wasn't nearly enough to stem falling market share issue.
Nokia is phone manufacturer and to maintain relevance they need to maintain market share. The fact that MS bought the Nokia Devices and Services business now means that MS will own manufacturing facilities, distribution, etc and if market share continues to drop, the potential impact to MS share price and market perception is huge. Look at the negative impact the Surface write downs had in 2013. Some argue that the Surface write offs where a catalyst in the Steve Ballmer decision to step down.
In my opinion the WP/Symbian decision and the subsequent failure of WP to gain share in the very large markets like China and India was the catalyst for the announcements at MWC. Of note here is the different approaches of the two firms.
Before I get into the strategy and my thoughts I think it is important to also understand Microsoft's current position in Mobile.
Microsoft holds a number of key patents in the mobile space. And even though Android is an "open source" project, many of the key capabilities of Android actually working on a device are subject to those patents. So over the last few years MS has struck patent licensing deals with every major Android device manufacturer. While MS does not publish exact numbers on how much they get - some industry press folks have estimated that the total income that MS receives ranges from as little as $5 to as high as $15 per device and that MS may be realizing some $8B in revenue by 2016 in license fees from the sale of Android devices. This is actually much more than they make from Windows Phone.
Additionally, MS announced back in 2012 that is was transitioning to a device and services company. And while their initial foray into tablet devices (Surface) was not very successful, MS has been very successful with some of their services strategy. In particular Office365 and Azure have both grown to >$1B per year businesses for MS. But MS has yet to prove they can make money with their Bing, Outlook.com and OneDrive services.
So now on to the MWC announcements. Let's start with Nokia's new X line of Android devices that consume MS services.
By now having an Android device, Nokia can market to folks that they are getting Nokia device quality with the most popular OS. MS can potentially gain additional Outlook.com, OneDrive and Skype users but will lose any patent income for each device sold.
Personally I think this strategy shows desperation. Nokia's market share in China is plummeting and with many Chinese firms now releasing very price competitive Android products, I don't think the X line will change things for Nokia. I don't think the addition of MS services on top of Android will be very compelling for buyers.
MS was shrewd by adding additional OEMs to the mix. Especially Lenovo, LG, Coolpad and Huawei. These firms along with Samsung are growing the fastest. WP has effectively become a Nokia exclusive and MS needed some additional exposure to try and gain market share. The real question will be even with these additional OEMs can WP gain enough share in China to be relevant.
But overall this combined strategy is just really stupid in my opinion. Considering the development effort to take Android AOSP and then develop a UI and the associated apps, I would have much rather seen Nokia/MS build a lite version of WP that ran well on very low cost devices and specifically to support the services that MS would provide.
There are some in the press stating that MS is going to kill the X Line off once the MS/Nokia deal in final - and that makes this strategy even more stupid - because for every person that does buy one of the X devices - who is going to support them ? If the answer is no one - then MS/Nokia just alienated those users and they will most likely not buy again from MS/Nokia
When compared to the competition, MS has all the parts to provide a very complete mobile experience. They have a world class device manufacturer in Nokia. They have Bing for Search and News/Sports/etc apps, Outlook.com for email/calendar, OneDrive for Cloud Storage, Skype for messaging/calling, Xbox Live for Music/Video/Games and a store for 3rd party Apps. Add to that Office and the ability to support enterprise productivity services like Exchange/SharePoint/Lync and in theory you have a very compelling story.
But yet, WP struggles and in some cases very badly. Why ?
To me it has to come down to leadership and culture. For all of his attributes, Steve Ballmer just flat out dropped the ball on mobile. MS had a clear leadership position in mobile for several years but never reacted properly to Apple and then Google. By the time MS did react it was too little, too late and now MS will have to really grind to try and gain relevance. I am not sure that Mr Nadella will be able to turn the ship that quickly.
Also MS culture treated Windows Phone like any other OS aimed towards devices and focused on it's ecosystem of OEM partners to buy licenses. That model hasn't worked out very well and I'm not 100% that the new OEM partners will actually move the needle substantially.
Finally MS did a poor job with execution on WP. WP7 was pretty miserable, 7.5, then 7.8 showed some improvement, but too slow for the market. WP8 is definitely better but MS made a huge mistake in my opinion by allowing the carriers to control the update/patch/release process. Instead they should have used the excellent Windows Update method.
In fact I believe the issue is so severe that it has effected Windows 8. MS can complain all they want that their OEM partners were slow to market with devices that made the Win 8 Modern UI experience compelling, but there is a new reality. MS is no longer the only game in town and much of the new app development community has moved away from Windows and Windows Phone.
Sure you can argue that MS maintains a 90%+ market share in PCs and I think MS will maintain that share, but there is a complete new market much larger than PCs where MS may only maintain a 10% market share. And that is where a huge amount of new revenues will come from. Look at what has happened to Apple in the last 7 years. In 2006 Apple generated $19.32B in total revenue while Microsoft was at $44.3B. in 2013, Apple revenue was $170.91B and Microsoft was $77.85B.
What I have yet to see from MS is a comprehensive approach to branding and market positioning around mobile. For example an MS branded device at the higher end and Nokia devices at the lower. While MS created an MS branded tablet in the Surface, they seem unwilling to do so with a phone. And even if that is on their radar, there appears to be no sense of urgency. MS is every bit as well known a brand as Nokia worldwide - so is MS afraid of getting into the phone business even though they state they are a device and services company ? If so then why did they buy Nokia Devices and Services ?
So, Nokia announcing new ASHA and Android devices plus MS announcing some new WP OEMs was somewhat shrewd, mostly desperate and really really stupid.
First, Microsoft announced a number of new OEM partners for Windows Phone including Lenovo, LG, Foxconn and others.
Then Nokia announced their strategy for the next billion devices and it encompassed two new ASHA ultra-low end devices and three new Android devices that would utilize Microsoft services like Outlook.com, OneDrive and Skype called the X line.
So what's going on here ?
First let's take a look at where Windows Phone sits in the market place today. It's hard to believe, but Windows Phone (WP) is now 3.5 years old and it's success has been very mixed.
Worldwide, WP holds about a 3.7% market share - a very distant 3rd to Android and iPhone. For example here in the US, Windows Phone holds about a 5% market share according to the Kantar WorldPanel ComTech reports with Android at 54.8% and iPhone at 38.9%.
In Europe it is a very different story. Since Nokia has a much better reputation in many EU countries, WP had done quite well - for example Italy where WP holds a 17.5% market share with Android at 67.3% and iPhone at 12.6%. There are similar share results in several EU countries as well as Great Britain.
But in China, the largest market in the world, WP has failed miserably. WP holds only a 0.7% share, Android is 80.9% and iPhone at 17.9%.
Now let's look at Nokia. Nokia is world's 2nd largest phone vendor with a 15.7% Worldwide market share according to IDC. Samsung is first with a 27.7% market share. The challenge for Nokia however is that in the last year their overall market share has dropped from 22.5% while Samsung, Apple, LG and others have seen growth. In fact prior to the Microsoft and Nokia partnership around Windows Phone, Nokia was the world's largest handset vendor at some 35% worldwide market share.
A major contributor to the market share drop has been the movement from feature phones to smartphones. Nokia had very popular lines of ASHA and Symbian based devices that sold well worldwide. But in 2011 MS and Nokia made an announcement that Nokia's Primary Smartphone OS would be WP. Since then folks who have been moving to Smartphones, have moved away from Nokia. And while Nokia was able to see good sales with the low cost 520 and 620 WP models, it wasn't nearly enough to stem falling market share issue.
Nokia is phone manufacturer and to maintain relevance they need to maintain market share. The fact that MS bought the Nokia Devices and Services business now means that MS will own manufacturing facilities, distribution, etc and if market share continues to drop, the potential impact to MS share price and market perception is huge. Look at the negative impact the Surface write downs had in 2013. Some argue that the Surface write offs where a catalyst in the Steve Ballmer decision to step down.
Before I get into the strategy and my thoughts I think it is important to also understand Microsoft's current position in Mobile.
Microsoft holds a number of key patents in the mobile space. And even though Android is an "open source" project, many of the key capabilities of Android actually working on a device are subject to those patents. So over the last few years MS has struck patent licensing deals with every major Android device manufacturer. While MS does not publish exact numbers on how much they get - some industry press folks have estimated that the total income that MS receives ranges from as little as $5 to as high as $15 per device and that MS may be realizing some $8B in revenue by 2016 in license fees from the sale of Android devices. This is actually much more than they make from Windows Phone.
Additionally, MS announced back in 2012 that is was transitioning to a device and services company. And while their initial foray into tablet devices (Surface) was not very successful, MS has been very successful with some of their services strategy. In particular Office365 and Azure have both grown to >$1B per year businesses for MS. But MS has yet to prove they can make money with their Bing, Outlook.com and OneDrive services.
So now on to the MWC announcements. Let's start with Nokia's new X line of Android devices that consume MS services.
By now having an Android device, Nokia can market to folks that they are getting Nokia device quality with the most popular OS. MS can potentially gain additional Outlook.com, OneDrive and Skype users but will lose any patent income for each device sold.
Personally I think this strategy shows desperation. Nokia's market share in China is plummeting and with many Chinese firms now releasing very price competitive Android products, I don't think the X line will change things for Nokia. I don't think the addition of MS services on top of Android will be very compelling for buyers.
MS was shrewd by adding additional OEMs to the mix. Especially Lenovo, LG, Coolpad and Huawei. These firms along with Samsung are growing the fastest. WP has effectively become a Nokia exclusive and MS needed some additional exposure to try and gain market share. The real question will be even with these additional OEMs can WP gain enough share in China to be relevant.
But overall this combined strategy is just really stupid in my opinion. Considering the development effort to take Android AOSP and then develop a UI and the associated apps, I would have much rather seen Nokia/MS build a lite version of WP that ran well on very low cost devices and specifically to support the services that MS would provide.
There are some in the press stating that MS is going to kill the X Line off once the MS/Nokia deal in final - and that makes this strategy even more stupid - because for every person that does buy one of the X devices - who is going to support them ? If the answer is no one - then MS/Nokia just alienated those users and they will most likely not buy again from MS/Nokia
When compared to the competition, MS has all the parts to provide a very complete mobile experience. They have a world class device manufacturer in Nokia. They have Bing for Search and News/Sports/etc apps, Outlook.com for email/calendar, OneDrive for Cloud Storage, Skype for messaging/calling, Xbox Live for Music/Video/Games and a store for 3rd party Apps. Add to that Office and the ability to support enterprise productivity services like Exchange/SharePoint/Lync and in theory you have a very compelling story.
But yet, WP struggles and in some cases very badly. Why ?
To me it has to come down to leadership and culture. For all of his attributes, Steve Ballmer just flat out dropped the ball on mobile. MS had a clear leadership position in mobile for several years but never reacted properly to Apple and then Google. By the time MS did react it was too little, too late and now MS will have to really grind to try and gain relevance. I am not sure that Mr Nadella will be able to turn the ship that quickly.
Also MS culture treated Windows Phone like any other OS aimed towards devices and focused on it's ecosystem of OEM partners to buy licenses. That model hasn't worked out very well and I'm not 100% that the new OEM partners will actually move the needle substantially.
Finally MS did a poor job with execution on WP. WP7 was pretty miserable, 7.5, then 7.8 showed some improvement, but too slow for the market. WP8 is definitely better but MS made a huge mistake in my opinion by allowing the carriers to control the update/patch/release process. Instead they should have used the excellent Windows Update method.
In fact I believe the issue is so severe that it has effected Windows 8. MS can complain all they want that their OEM partners were slow to market with devices that made the Win 8 Modern UI experience compelling, but there is a new reality. MS is no longer the only game in town and much of the new app development community has moved away from Windows and Windows Phone.
Sure you can argue that MS maintains a 90%+ market share in PCs and I think MS will maintain that share, but there is a complete new market much larger than PCs where MS may only maintain a 10% market share. And that is where a huge amount of new revenues will come from. Look at what has happened to Apple in the last 7 years. In 2006 Apple generated $19.32B in total revenue while Microsoft was at $44.3B. in 2013, Apple revenue was $170.91B and Microsoft was $77.85B.
What I have yet to see from MS is a comprehensive approach to branding and market positioning around mobile. For example an MS branded device at the higher end and Nokia devices at the lower. While MS created an MS branded tablet in the Surface, they seem unwilling to do so with a phone. And even if that is on their radar, there appears to be no sense of urgency. MS is every bit as well known a brand as Nokia worldwide - so is MS afraid of getting into the phone business even though they state they are a device and services company ? If so then why did they buy Nokia Devices and Services ?
So, Nokia announcing new ASHA and Android devices plus MS announcing some new WP OEMs was somewhat shrewd, mostly desperate and really really stupid.
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