Nokia may be a fatal attraction to Microsoft. According to Microsoft's Strategic Rationale (pdf) for the acquisition, Microsoft's smartphone market share will grow to 15% by 2018. With more than half of its revenues and operating profits from Windows and Office at risk due to the shift from PCs to mobile, Microsoft is moving too slowly and too conservatively in its response. A seamless Microsoft-branded smartphone/tablet/PC strategy does not address the other 85% of non-Microsoft smartphone users siphoning off the content that was once the exclusive domain of Microsoft.
Microsoft has confused its mobile strategy with its desire to protect its desktop revenues. Due to the agonizing actual and forecasted decline of PC shipments, Microsoft has positioned Windows Mobile, Windows RT and Surface Pro on a continuum with PCs. It is this strategy - forcing its PC customers toward smartphones and tablets - that has slowed Microsoft's mobile market share gains, distracted the company's employees and produced a near billion-dollar loss due to last quarter's inventory write down. Now Microsoft could be at risk of squandering its mobile influence on Nokia and proprietary devices.
According to a March report by Arete Research, before the Nokia acquisition, almost all mobile industry profits are concentrated within Apple and Samsung. Microsoft's proprietary mobile device strategy locks them into winning the first or second market share position in both the mobile device market and the mobile software and services market. Microsoft is unlikely to displace Apple and Samsung as the top two in the device market, and should turn its attention to exploiting its enterprise leadership and building its cloud offering to make a run at the mobile software market. Although Microsoft has claimed that the Nokia business will break even in 2015 and turn a profit the following year, it will be challenging to sustain strong margins against low-cost Android smartphones.
Microsoft's success in mobile depends on its openness to Android and iOS devices, which make up the other 85% of the market. Microsoft's still-successful position with Microsoft Office/Exchange is its only advantage in reaching more of the mobile market. Harvard Business School Professor Willy Shir pointed to Microsoft's opportunity to use Office to exploit the shift to mobile.
"As hardware once again becomes a commodity, the value in the mobile market will be in software, and here it could well be Office 365 could become a key platform if Microsoft plays its hand well."
How Microsoft can fix it
Microsoft should adopt a prosumer strategy and start offering free Office on iOS and Android with email and free document storage. This kind of offer would validate a cross-platform use case with consumers.
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