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Microsoft's Nokia Purchase Is All About the Ecosystem

The end result, Microsoft hopes, will be its own comprehensive ecosystem.
September 3, 2013, 4:15pm
The Nokia Lumia 1020, whose built-in camera is a potential step forward for smartphone shooters.

Aging behemoths became one today, with Microsoft's announcement of a $7.2 billion purchase of Nokia's phone division and a related patent portfolio. It solidifies the pair's two-year-old partnership to give Windows Phone an upstart's chance against iOS and Android, but it also reinforces Microsoft's unfamiliar position as a relative newcomer trying to take away market share from more established ecosystems.

The value of spending billions to secure what Microsoft already had—guaranteed access to Nokia's handset prowess—has already been discussed widely. The prevailing sentiment is that the deal doesn't make sense unless Nokia forced Microsoft's hand, perhaps by suggesting it might move towards Android. But that's a fairly narrow reading of Microsoft's desire to become a full-fledged device maker to secure Windows' market share into the future.

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With Nokia CEO Stephen Elop returning to Microsoft to lead its device team, what seems more likely is that the two companies' close relationship and heavy investment in Windows Phone made combining forces—and potentially trimming fat—the more attractive option. That's the rationale laid out by Microsoft in its own documents. The end result, Microsoft hopes, will be its own comprehensive ecosystem.

"Clearly, greater success with phones will strengthen the overall opportunity for us and our partners to deliver on our strategy to create a family of devices and services for individuals and businesses," outgoing Microsoft CEO Steve Ballmer wrote in an internal email.

That Microsoft expects to secure its future by developing an Apple-like network of hardware and software is far from surprising, as it's been moving that way for years now. But the sheer size of a community is key to its utility. Early on, Android had difficulty keeping up with iOS's development and app advantage, and still lags with the seamless connectivity between iOS and OS X, although Google's cloud prowess and plethora handset options have more than made up the difference.

Windows still dominates the desktop market, and it makes sense that Microsoft would try to leverage those users into going Windows across all devices. The Nokia purchase means Microsoft now has the potential to produce its own iPhone, with all of the advantages of keeping users in house that entails. But while Apple had a solid first smartphone and a dedicated (if smaller) user base, the biggest advantage it had in developing its own hardware-software bubble was being first. Because once people buy into a sphere, it's very hard to get them out.

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That's backed up by the latest mobile market share numbers from Kantar World Panel. While Windows Phone's share has continued to grow—backed by clever, ambitious Nokia offerings like the Lumia 1020 and solid top-end offerings like the 925—it remains only 3.5 percent in the US market, where only 27 percent of iPhone or Android users switch operating systems when buying a new device. And even then, they generally switch between the two.

Where Microsoft has seen greatest growth with Windows Phone has been in first-time buyers, which Kantar notes includes markets in Europe and Latin America that don't offer rebates. That's a good sign for the company that its offerings are a solid value, which most reviewers tend to agree on anyway. But getting established users to buy in is another problem.

This is similar to the problems Apple faced in the iMac days. A user-friendly operating system and a bunch of cool-looking computers helped Apple define itself as the Windows alternative, but Windows' software advantage and Microsoft's early lead and skill at getting Windows into every PC out there has as yet been impossible to surmount.

In mobile, the tables have been reversed. As Windows 8's departure from the past has shown, Microsoft is dedicated to doing what it takes to create a cohesive environment across devices. What it needs now is to prove that it can offer a unique mobile experience, because when facing the largesse of the iOS and Android economies, simply having the best phone isn't enough.

The Lumia 1020's emphasis on photography is a push in the right direction, and by integrating Nokia, Microsoft hopes to continue to bring users into its fold. The simple reality is that getting users more invested into an ecosystem makes them far less likely to leave, and Microsoft knows that it can't continue to rely on its software advantage in the desktop space.

Convincing users to stay in Windows land is easy when the majority of computer users worldwide already use it, and Microsoft making its own phones will help close that loop. To truly chip away at the market, Microsoft is going to have to do something more groundbreaking than release its own slickly-designed, tightly-integrated iPhone. Time will only tell what that looks like, but it's clear the firm is dedicated to making it happen.

@derektmead