Analysts hail Nokia sale to Microsoft but warn of challenges

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Agreement will enable manufacturer to compete with Samsung and Apple but the need to significantly invest in Windows Phone means success won’t be generated immediately

Analysts have said the deal for Microsoft to acquire Nokia is a perfect fit for both companies, but many challenges lay ahead before they can challenge for smartphone supremacy.

Microsoft announced this morning that it had bought Nokia’s mobile phone business for €5.4 billion (£4.6 billion).

Nokia’s 32,000 employees will transfer to Microsoft when the deal is finalised early next year, which will include Nokia’s devices and services division, patents and HERE mapping service.

The manufacturer signed a deal with Microsoft in February 2011 that saw it adopt Windows Phone as its main operating system.

Commenting on the acquisition, Ovum principal device analyst Tony Cripps said that Microsoft should be aiming for OS market share of 15 per cent in the next few years to demonstrate its ability to be a market leader, but will need to up its marketing investment in order to achieve this.

“While Microsoft and Nokia have jointly been increasing the money flow through the Windows Phone marketing faucet of late, it will take mega bucks to take on Apple and Android head-cheerleader Samsung for marketing and volume shipments. We need to see that kind of commitment coming before we can really count Microsoft in the same league as its two main competitors.

“There is also a sense that while Microsoft has many of the key elements for consumer tech market success in place, too many of those elements feel like they are not quite at parity with their rivals.

“That said, Microsoft has some areas of definite advantage over its rivals across this vast battleground, especially in gaming, consumer-business crossover services such as VoIP and in the ease of integration of Windows Phone with its own Office 365. Moreover, we shouldn’t forget its huge global installed base of PCs, which are as much a part of the complete picture as smartphones, tablets and online services.

“What is almost for certain is that beyond Apple and Google, Microsoft is the best equipped of today’s consumer tech giants to be able to put all the requisite pieces in place to succeed long term. Execution is another matter though and Ovum needs to see sustained progress in Windows Phone shipments over the next three or four years – 15 per cent market share is a good target to aim for – to be convinced that Microsoft can establish itself as a real consumer tech market maker rather than a follower.

CCS Insight chief of research Ben Wood believes this completely reshapes Microsoft and although it still remains a distant third behind Android and Apple in operator market share, the combination with Nokia will enable it to challenge the likes of Android and Apple.

“We see this move as a bold, but entirely necessary gamble by Microsoft. Mobile needs to be a cornerstone of Microsoft’s business for future success. The failure of Microsoft’s platform-only approach over the last 15 years has left it with few alternatives given its almost complete reliance on Nokia for Windows Phone devices and the competitive ecosystem strength of Google and Apple.

“This is by no means a silver-bullet solution to Nokia and Microsoft’s current difficulties. The massive restructuring that has taken place within Nokia over the last two years offers Microsoft a more stable foundation on which to focus its efforts in mobile, but Windows Phone remains a distant third place in the smartphone race.

“Acquiring Nokia’s devices and services business reshapes Microsoft’s business. The company has largely avoided a significant commitment to hardware. That now changes with the transfer of 32,000 Nokia employees into Microsoft.

“A more integrated approach to hardware, software and services will help overcome some of the challenges Nokia and Microsoft have faced operating as independent entities in terms of service integration, marketing consistency and costs, as well as time-to-market for new devices and updates.

IDC research director for European mobile devices Francisco Jeronimo said the deal will particularly benefit Nokia as Microsoft is the only logical company that would invest in Windows Phone to enable it to compete with Samsung and Apple in the smartphone market.

“While Microsoft realised that it wouldn’t be possible to succeed without controlling the entire value chain, Nokia has realised that it needed a stronger ally with the financial muscle to continue driving its Lumia smartphones.

“Nokia realised it didn’t have the financial resources to become the third alternative to Apple and Samsung in the smartphone segment. Instead of waiting to see whether that would change and eventually risk running out of cash, it decided to sell itself to the only company really keen to invest in Windows Phone.

“Today’s agreement will be well received by mobile operators as Microsoft will align the software and hardware development, speeding up the Windows Phone operating system, but more importantly it will give operators access to Microsoft’s deep pockets, which it will use to promote Windows Phones.

“Although Microsoft is buying the entire Nokia Devices unit, it is still unknown what the company will do with this segment. Feature phones continue to represent a significant percentage of worldwide shipments, but that will drastically change in the next few years. In the long term there is a small market opportunity in the segment, but in the short term it is important that Microsoft keeps the segment alive and profitable. This will give it access to markets where feature phones are still the dominant segment and where the Nokia’s brand is still strong.

Analysis Mason principal analyst Ronan de Renesse said that while the acquisition is a logical step for both companies, it will not generate any dramatic success in the next 12 months.

“The acquisition will have a limited impact on the smartphone market in short/medium term. Nokia and Microsoft have been working hand-in-hand for 2.5 years on the Lumia device range and we don’t expect the acquisition to fundamentally change the Lumia team and its product roadmap for the next 12 months.

“The biggest opportunity for Microsoft is in the non-smartphone space. Microsoft will gain a foothold in developing market via Nokia’s non-Lumia device portfolio; 45.5% of Nokia mobile device shipments went to Greater China, Middle East & Africa and Latin America in 2012. This strengthen Microsoft’s position versus Google in connecting the next billion people.

“Microsoft must make a decision on the business model to adopt in mobile. The handset market is extremely competitive making it particularly hard to sustain high margins and make a profit. Microsoft has the ability to undercut its competitors and use mobile as a loss leader to gain global reach for its services and software ecosystem. No handset manufacturer except Nokia has been fully committed to Windows Phone platform in the past 12 months. Maybe it’s time for Microsoft to abandon its Windows licensing model in mobile.”

Juniper Research said that while increasing overall market share will continue to be a challenge, buying Nokia will enable it to gain a presence in emerging markets through the handset manufacturer’s Asha range.

“While this acquisition provides Microsoft with a much needed uplift and presence in the mobile sector, integrating these new assets, brand building and increasing market share will be the real challenge.

“Microsoft will get a larger footprint in the emerging markets with Asha as Nokia has committed substantial investment to the Asha range. This means the customer would perceive a switch from Asha to Lumia to be a whole scale upgrade in their entire ecosystem rather than just a smartphone.”

Kantar Worldpanel ComTech strategic insight director Dominic Sunnebo feels the deal is particularly important for Microsoft as it couldn’t afford for Nokia to partner with a rival OS but that the acquisition will do nothing to calm fears of a lack of Windows Marketplace apps attracting Android or Apple users.

“Microsoft’s acquisition of Nokia makes a lot of sense. Nokia is absolutely vital to Microsoft’s prospects in the mobile arena and it simply couldn’t afford for Nokia to consider switching to a competitor platform like Android in order to increase its sales.

“Windows Phone has been steadily increasing its share of the smartphone market, particularly in areas where Nokia has historically been strong such as Europe. However in the US, where Windows accounts for just 3.5% of smartphone sales and Nokia has struggled to make an impact, there remains a real challenge that Microsoft probably feels it is best placed to try and crack.

“The biggest barrier to Windows’ success remains the relative lack of apps compared to Apple and Android. Until this issue is addressed Windows will struggle to convince consumers using competitor systems to switch to its platform and will have to rely on first-time smartphone buyers to drive growth of its operating system, as has been the case until now.”

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