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Microsoft's Nokia Buy Ends 'Phone Maker' Era

Microsoft's purchase of Nokia is yet another shift in power from hardware makers to companies that control the app ecosystem. It's a win for America too.
My office is in one of the buildings that used to house Nokia's main R&D center and 1,500 scientists. Today it is the campus of Aalborg University's Copenhagen branch. We use the old Nokia board of directors meeting room for our Christmas lunch. It makes me think about what caused the decline of this once global powerhouse.

This week Microsoft acquired Nokia's hardware business, some of its key patent licenses and Navteq map services -- plus 32,000 employees -- for $7.2 billion. In 2007, Nokia paid $8.1 billion for Navteq. Under CEO Stephen Elop's tenure, Nokia's stock price has fallen from $10.50 to $5.25 per share.

When Elop decided to jettison the company's Symbian operating system in favor of Microsoft's Windows Phone OS in February 2011, Nokia sold more phones on an annual basis than Apple and Android-based phones combined. Nokia phones never took hold in the U.S., a fraction of the world's mobile market but no doubt a lucrative one. But Nokia phones were plentiful in the rest of the world. It specialized in making phones at all price points, and they were in the hands of many users in Asia and Africa, where mobile penetration is exploding. To this day, there is still no dedicated Apple Store in India.

Even though Microsoft bought Nokia for a dirt-cheap price, Microsoft still faces big challenges to becoming a serious player in mobile. For starters, Microsoft still needs to demonstrate to network operators and end users why they should use Windows Phone over iOS or Android. Microsoft would like the smartphone/tablet world to be like the Xbox, where it controls the hardware and the software. But to increase adoption of its Windows Phone platform it will need a compelling value proposition. It hasn't been able to do that so far.

[ For more on what Microsoft's acquisition means, see Microsoft's Nokia Buy: Consumer Chase Is On. ]

The Pew Research Center's Internet and American Life Project asserts that 95% of young adults connect to the Internet with a smartphone. Furthermore, Center for the Digital Future director Jeff Cole asserts that only 4 to 6% of computer users need a PC. With the exception of heavy users for spreadsheets, word processing and computer aided design, tablets will likely be the preferred device. Today's websites are being remade to be mobile, and many companies, including Yahoo, are shifting their business model to be mobile first.

For more than 13 years, Microsoft has been trying to enter the mobile industry in a major way. Their first foray was in 2000 with the iPaq made by Compaq. It was a pocket PC/digital assistant with a Microsoft operating system. It launched "Windows Phone" in 2010. It bought Skype in 2011 for $8.5 billion when the VoIP service earned less than $1 billion. It's unclear what kind of revenue Skype can drive for Microsoft. Will consumers pay $4 per month for upgraded video calls in Skype?

With the purchase of Nokia, Microsoft has pulled its last card and secured control of its one major partner in the mobile space. HTC and Samsung will probably not be pleased, but they both gave Microsoft the cold shoulder in their pivot to Android.

The decline and acquisition of Nokia by Microsoft marks an end of the era in which the phone maker calls the shots. Consumer IT and Internet companies such as Apple, Google and Facebook (which could be a mobile disruptor either with a Skype clone or a Facebook MVNO) now dominate the emerging mobile world. All of these leaders realize that handsets are not enough. If they want to win, they have to own the ecosystem: the users' credentials, the operating system, the app marketplace, AND the hardware and software.

In the big picture, Microsoft's acquisition of Nokia is a win for America in the world war for mobile supremacy. The U.S. is leading in mobile broadband networks, mobile phones, mobile Web platforms and mobile operating systems, for the time being anyway. Not only does the U.S. have the world's fastest mobile speeds on its fresh 4G network, it has more LTE devices than any country in the world.

Microsoft's purchase might be called the $7.2 billion hedge against Lenovo, Huawei or another Chinese player buying Nokia and getting a leg up in the western market. America is leading in mobile for the moment, and Microsoft's Nokia buy is another victory, but if the decline of Nokia -- and BlackBerry too -- are any lessons, no company or country should rest on its laurels.

Learn more about the mobile business by attending the Interop conference track on Mobility in New York from Sept. 30 to Oct. 4.