How is Elop going to address this by using Windows OS? He has to do more than just charge more, he has to produce better product at competitive prices, which keep getting lower. Elop will have to license the Widows OS, which is an expense, one that he would bear to nowhere near the same extent if he used Android. I feel he mistakenly looks at this as Google commoditizing the Android platform, in lieu of the more reasonable perspective of Google commoditizing the entire portable computer space.
Well, the answer has arrived. Microsoft is buying Xx% of Nokia for paying Nokia over $1 billion to product Windows Phone 7 hardware. Nearly all of this money is undoubtedly going into R&D and marketing. Nokia and Microsoft (their new defacto owners) invariably see Google as the pre-eminent trheat and are pulling out all of the stops to nullify said threat. This also answers the question of how Elop, the Nokia CEO will be able to deal with the reduced margins of having to buy OS licenses while competing with vendors who get Android for free - Microsoft is not only footing the bill, but investing in the business as well. You see, the drop in Nokia's share price is highly unwarranted and their is visible synergy in this deal. Nokia gets to remove the costs of OS R&D from its line times, sunk costs that have apparently had negative incremental returns as they have had their asses handed to them by Apple and most definitely Google - who knocked them off of their number one market share perch in just over a year.
Microsoft gets the economic benefits of an existing hardware platform that happens to have the number one marketshare metric in the world, and gets it for just over a billion dollars. This is a win-win situation. The question is, will it win againt Google. Both companies will still fail if they don't execute on Google-time, who has compressed development cycle years into months - literally!
From the Bloomberg article linked above:
Shrinking Margins (yeah, you've hear thist from me often enough)
Espoo, Finland-based Nokia needs to cut costs to keep operating margins from narrowing further, after they shrank to 4.9 percent last year from 19 percent a decade earlier. For 2011 and 2012, Nokia may cut its budget for research and development in devices and services by about a third from last year’s spending of about 3 billion euros, said Sami Sarkamies, a Helsinki-based analyst with Nordea Bank.
Microsoft spokeswoman Melissa Havel declined to comment on the specifics of the agreement. Laurie Armstrong, a spokeswoman for Nokia, said the final contract hasn’t been signed and the company will share further details when they are complete.
Nokia’s royalty payments will help Redmond, Washington- based Microsoft make a profit on the accord even after the payments to Nokia, one person said. Some of the payment to Nokia would be made before the company starts selling the phones, meaning Microsoft bears some upfront cost in the partnership.
Microsoft shareholders want the company to salvage its mobile-software business while also reining in costs. The company doesn’t break out results for its mobile-software unit, and instead groups them with the profitable Xbox video-game business, making it difficult to evaluate the financial performance of phone software.
Chief Executive Officer Steve Ballmer has come under pressure from investors and his own board to improve sales of mobile software after the company lost market share to Google and Apple. Microsoft stock has declined 7.8 percent so far this year.
The agreement for the more than billion-dollar payment was part of a campaign by Microsoft to keep Nokia from choosing Google’s Android operating system, one of the people said. Nokia also opted for Microsoft because Windows Phone software, which is newer than Android and has a smaller number of handsets for sale, gives Nokia a better chance to stand out, one of the people said.
The agreement also has Microsoft paying Nokia for the right to use its patent portfolio, one of the people said.
As part of the deal, Microsoft will use Nokia’s Navteq mapping products for functions such as geolocation services and selling local advertising and coupons tied to a user’s position. If successful, that also could generate additional revenue for Nokia, which will share in the sales. The two companies will also divide revenue from services like search and advertising, Microsoft President Andy Lees said last month.
I've been warning my subscribers about margin compression in this space, and its about to get much uglier - to the extreme benefit of consumers of personal and enterprise tech. Previous (and prescient) posts from last year on this topic...
- Don’t Count Microsoft Out of the Ultra-Mobile Computing Wars Just Yet
- After Getting a Glimpse of the New Windows Phone 7 Functionality, RIMM is Looking More Like a Short Play
- As I Warned in June, DO NOT DISCOUNT Microsoft in This Mobile Computing War! Their Marketing Campaign is PURE GENIUS! and it Appears as if the Phone Ain’t Bad Either
- Apple on the Margin
- How Google is Looking to Cut Apple’s Margin and How the Sell Side of Wall Street Will Enable This Without Sheeple Investor’s Having a Clue
Monetizing the Mobile Computing Race
We have a pretty firm idea of who is in the pole position as of now, but that position is both risky and volatile, not to mention medium to long term in nature - see Navigating BoomBustBlog Subscription Material To Find The Google Valuation Drilldown.
A more risk averse strategy is to go long on the component vendors who supply those battling for pole position. Last week we released the document Long candidate #1 - Hardware: The Mobile Computing Wars to subscribers that outlined who our number one pick was after an initial scan. This is not necessarily the absolute final say on the matter since we have yet to perform a full forensic analysis, but the company does look good in comparison to over 120 peers. Non-subscribers should reference The Potential Equity Investments Most Likely To Prosper From the Google/Apple/Microsoft Mobile Computing Battle.
I am releasing the draft of the full shortlist of prospective long candidates as of now (17 pages, 5 companies) to subscribers. Please be aware that is a draft document and work in progress, but it is quite informative nonetheless. See Mobile Computing Vendor Long List Note WIP. Those who wish to subscribe should click here.
Click here to read up on all of Reggie Middleton's Mobile Computing War opinion, analysis, and research.