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9/3/2013
10:32 AM
Michael Endler
Michael Endler
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Microsoft's Nokia Buy: Consumer Chase Is On

Microsoft can't live by enterprise dollars alone. By purchasing Nokia's device business, Microsoft has shown its consumer strategy will survive into the post-Ballmer era.

Microsoft's courtship with consumers is far from over. Now that the company is set to acquire Nokia's Devices and Services business, there can be little doubt: CEO Steve Ballmer might be retiring, but the "one Microsoft" plan on which he reorganized the company is just getting started.

Microsoft's attempt to woo consumers has been hotly contested in the days since Ballmer announced he will be stepping down. The anti-consumer argument is simple: Because Microsoft makes most of its money from the enterprise, it should focus on its enterprise products instead of chasing Apple and Google in the mass market. When it was revealed over the weekend that activist hedge fund ValueAct will soon have the option to gain a seat on Microsoft's board, such arguments seemed destined to grow louder.

The Nokia acquisition changes that. As InformationWeek's Eric Zeman pointed out, the deal takes a page from Apple's playbook in that it will allow Microsoft to produce Windows Phone devices that more cohesively blend hardware and software. In a research note, Frost & Sullivan research director Adrian Drozd drew similar conclusions, writing that "Microsoft can use Nokia to really drive innovation on the platform, as Google is doing with Motorola."

Drozd said Microsoft needs to keep other OEMs such as Samsung and HTC in the Windows Phone ecosystem, suggesting Microsoft should use Nokia to set a standard toward which partner manufacturers can aspire. That sounds good -- but it's the same strategy Microsoft chose for its underperforming Surface tablets, which have done little to stimulate interest in Windows 8. Skeptical shareholders will surely wonder why Microsoft is charging forward with a strategy it hasn't yet shown an ability to execute.

[ What about Microsoft's struggling tablet business? Read Microsoft Needs 3 Surface Tablets: 3 Reasons. ]

In an interview conducted before the Nokia announcement, Forrester analyst David Johnson offered insight into Microsoft's consumer-centric motivation. "[Microsoft has] to appeal to people who have work to do. Consumers get up in the morning and become employees," he said, adding that the company "absolutely needs consumers."

Indeed, on the day he announced his retirement plans, Ballmer made similar remarks in an interview with ZDnet.

"If you're going to be in email, you're going to be in email. You can't say, okay, I only want to be in enterprise email," he said, stating that the alternative is to "be like Oracle and not participate in certain high-value activities."

What kind of "high-value activity?" According to a recent Gartner study, many employees would continue bringing iPads into the office even if given company-issued Windows 8 hybrid devices. The subtext is that if consumers enjoy using a device in their personal lives, they'll find a way to use it at work -- even, in many cases, if the device isn't part of the company's official device policy. There will always be a need for enterprise-focused technology companies, but consumerization is real, and Apple's example has weighed heavily on Microsoft's goals. As Gartner analyst Carolina Milanesi put it in an interview with InformationWeek in April, if Microsoft gets the consumer, it will get the enterprise.

But can Microsoft get the consumer? At face value, the company's recent agreement with ValueAct speaks to this question. The hedge fund owns a little under 1% of Microsoft's outstanding shares and reportedly opposes the company's move to make its own devices. Under the agreement, the Microsoft board will receive regular input from ValueAct president Mason Morfit, who will have the option to join the board in 2014.

ValueAct's involvement shows that Microsoft is cognizant of shareholder unrest -- but the company is still a long way from jettisoning its consumer business, a la IBM. That sort of move would mean embracing a more targeted and modest future than anyone at Microsoft, current board members included, seems to want.

Indeed, after Ballmer announced his intent to retire, board member John Thompson endorsed the outgoing CEO's belief in an ecosystem of devices and services that spans the consumer and business spheres. Microsoft VP of corporate communications Frank Shaw even took a turn for the poetic when he defended the company's direction.

"We believe that technology is the key to unlocking human potential in all its forms, and that our job is to make it as broadly accessible as possible," he wrote in a blog post that reprimanded critics for underplaying Ballmer's considerable success. "[We believe] people don't stop being people when they go to work or stop making things happen when they go home."

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cbabcock
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cbabcock,
User Rank: Strategist
9/4/2013 | 11:25:18 PM
re: Microsoft's Nokia Buy: Consumer Chase Is On
It's true Microsoft is trying to preserve a hardware partner on the brink of failure, but that partner produces consumer mobile devices. There' s no point in making this move if you're in a headlong chase after consumers. But your effort places you in the back of the pack.
WKash
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WKash,
User Rank: Author
9/4/2013 | 8:32:10 PM
re: Microsoft's Nokia Buy: Consumer Chase Is On
Another way at looking at this is that Microsoft's decision to buy Nokia's smartphone business and patents was as much about preserving a crucial, dedicated hardware partner as it is about getting more squarely in the consumer game.
Thomas Claburn
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Thomas Claburn,
User Rank: Author
9/3/2013 | 8:39:05 PM
re: Microsoft's Nokia Buy: Consumer Chase Is On
Microsoft seems to be trying to run its own game using Apple's playbook and it's far from clear that it can do so. There are not many other examples of successful hardware/software companies. BlackBerry comes to mind as an example of what not to do. Apple seems to be more the exception than the rule, so I doubt that Microsoft will prosper with Nokia's baggage.
cbabcock
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cbabcock,
User Rank: Strategist
9/3/2013 | 6:08:41 PM
re: Microsoft's Nokia Buy: Consumer Chase Is On
Excellent analysis here. Microsoft believes it must be a consumer company and is on a mission, I guess, to prove that one massive consumer hit, Windows, guarantees another. It ain't necessarily so. Microsoft first gained the consumer market by producing good consumer software, then using agreements with PC manufacturers to place its operating system -- and not anyone else's -- on new PCs. It could reward manufacturers with a price advantage if they did; punish, if they didn't. This control point no longer exists. You have to win consumers by appealing to consumers. In that sense, Steve Jobs took this direct route much more effectively than Microsoft ever did, Microsoft's DNA is more strongly as a software development company than as a company with consumer insight. It's now set out to prove that it has the insight, as well as the development smarts. I'm holding my breath.
rradina
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rradina,
User Rank: Ninja
9/3/2013 | 6:00:16 PM
re: Microsoft's Nokia Buy: Consumer Chase Is On
If it's based on Intel and it's running Pro, it could be a reasonable option in an already-crowded field. If it has an ARM chip and RT, the price is wrong. Competitors already offer a full Windows laptop-like tablet at that price point. Buying an RT device seems like less for the same price. Of course Microsoft has confused the market with it's ARM vs. Intel and touch vs. classic strategies that it's hard to tell what the public thinks of any of this.
Laurianne
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Laurianne,
User Rank: Author
9/3/2013 | 5:50:41 PM
re: Microsoft's Nokia Buy: Consumer Chase Is On
A $499 laptop-like tablet from Nokia in late Sept.? This surprises me that they would not learn from the reaction to Surface RT hardware.
Lorna Garey
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Lorna Garey,
User Rank: Author
9/3/2013 | 5:19:54 PM
re: Microsoft's Nokia Buy: Consumer Chase Is On
Seems like the draw of Nokia should be its patent portfolio, yet the deal only brings a 10 year license. I don't get the logic of that for MS.
DDURBIN1
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DDURBIN1,
User Rank: Ninja
9/3/2013 | 5:16:59 PM
re: Microsoft's Nokia Buy: Consumer Chase Is On
Acquiring Nokia doesn't give Microsoft resources to success. Microsoft has all the resources it needs at it's disposal. What Microsoft needs is better management and decision making at the top as current product features and pricing are designed to maximize the most profit not to satisfy the most consumers.
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