The mobile device world never rests. This was certainly true with this week's news that Microsoft had agreed to purchase Nokia's Devices and Services business for $5 billion and license various patent technologies for an additional $2.2 billion. The purchase agreement also includes the transfer of 32,000 Nokia employees to Microsoft.
The deal, which is expected to close in the first quarter of 2014, has set off a fresh round of questions about Microsoft's mobile strategy and its historic approach to licensing software to manufacturers. But it also raises some interesting possibilities, especially for enterprise customers and the government market in particular.
From a broad perspective, the purchase marks Microsoft's admission that to effectively compete with industry leaders like Apple and Google, Microsoft must control both the software and the hardware to produce an integrated product that offers an enhanced customer experience with wide consumer and enterprise appeal.
[ For more on Microsoft's latest acquisition, see Microsoft's Nokia Buy: Consumer Chase Is On. ]
This change in thinking represents a fundamental shift in Microsoft's macro strategy and how it approaches business in general. Simply partnering and licensing software to hardware partners is not enough to succeed anymore.
Vertical Integration vs. Software-Hardware Disaggregation
Since its founding, Microsoft has employed one of the most successful cash-generating business models in the history of industrialization: License software to hardware manufacturers and let the manufacturers differentiate on features and price. Essentially the only costs Microsoft had were the costs to develop the first disk of code that shipped to all original equipment manufacturers (OEMs). After it had a code-complete version of a program, everything else was profit. Let the manufacturer worry about channels of distribution and getting the product to the end user. It was a well-oiled machine that worked stupendously well for more than 25 years.
In contrast, Apple insisted on staying with a vertically integrated model, developing both the hardware and the software in a seamless fashion, even if it meant inheriting all the logistical problems associated with channels of distribution. Remember, Apple's computer business was on the brink of bankruptcy before Microsoft came in and invested in the company. It was only after Apple had a hit with the consumer-centric iPod and introduced its integrated online iTunes Store that the company started to see resurgence.
Apple was adroit enough to leverage the runaway success of the iPod as a personal device by adding a radio, and presto, the iPhone was invented. Only a company with such a close hand-in-glove relationship between its hardware and software could come up with a product as elegant as the iPhone, which took the industry by storm.
Apple also appealed first and foremost to consumers rather than business users. Apple reasoned, correctly, that these consumers had work lives as well and would take their beloved devices to work to use as productivity tools.
For the first time, Apple's vertically integrated approach seemed to make a great deal of sense: Present the consumer with a terrific-looking, easy-to-use, all-in-one device that could be readily updated since Apple owned both the hardware and software platform. It was this consistency of platform and individual love for the device that have made the iPhone and subsequent Apple consumer products so appealing.
While Google's Android has taken a different and arguably more open course, Google's purchase of Motorola Mobility in May of 2012 is additional proof that vertical integration in the smartphone business is vital. That's not to say it's the only model for success -- after all, the world's number-one cell phone manufacturer is Samsung, a company that bases its high-end models almost exclusively on the Google Android operating system.
Repercussions for Government and Enterprise Customers
Perhaps the deeper question that's being overlooked is this: How will the Microsoft-Nokia deal enhance Microsoft's position with enterprise users -- particularly those in the U.S. government market, which is Microsoft's single largest enterprise customer?
It's important to note that while the PC market may be heading into its waning years, the vast majority of PCs running today are powered by Microsoft Windows and the omnipresent Office suite. And one of the most important elements of Office is Microsoft Outlook, a program that presents a single pane of glass to manage contacts, calendaring, e-mail and related personal information management (PIM) tasks.
Outlook represents the "client" side of Microsoft Exchange, the ubiquitous enterprise server software that powers roughly 95% of all U.S. federal email installations. Indeed, Exchange is so widely used that both Apple and Google realized early on that if they were to meaningfully attack the enterprise market (or at the very least, appeal to consumers who wished to bring their devices into work), they would need to license and support the Exchange Active Synch (EAS) protocol.
In 2013, the majority of users who access the Internet do so using a mobile device. Since EAS is supported or built-in to nearly all devices, Microsoft has an excellent chance of optimizing the Exchange mobile experience for its own products, especially in the management and security areas.
Microsoft is not only dominant in PIM and messaging; it can be argued that line-of-business (LOB) applications that already exist in enterprises are increasingly being pushed to mobile workers in the field or on the edge of the network. Applications ranging from sales force automation; supply chain logistics; inventory; inspections; medical triage and patient care; common operational picture (COP); and command, control, and communications, computers, intelligence, surveillance and reconnaissance (C4ISR) are readily being deployed on smartphones today across the government.
Because Microsoft owns the dominant server infrastructure (most of which has already been purchased under an Enterprise Agreement), it makes sense that federal organizations are trying to maximize their investments in tools and technologies that they already own and extend them to the field.
Microsoft collaboration tools such as SharePoint represent an excellent example of an enterprise application that is already being used in a mobile manner. Microsoft also has a vibrant footprint in the Unified Communications space with its widely used Lync product.
Given the still-dominant market share of Windows and Office and the federal government's reliance on Microsoft for server infrastructure, coupled with sequestration and budget cuts, it's not farfetched to see Microsoft playing a much larger role in federal mobility.