Microsoft's recent announcement that it would acquire Nokia comes as no big surprise. Since Microsoft's mobile strategy has not been robust, the two have paired efforts to speed development of a third mobile ecosystem. The goal is to build Windows 8 as a competitive mobile operating system, which Nokia had committed to several years ago.
But common wisdom and even some on Wall Street would suggest the mobile race is already over, with only two big horses left. Runners in the "race to be third" are well back in the pack, scattered, and limping towards a consolation prize – hence the relatively low price of the acquisition, which cash-rich Microsoft can easily swallow. Apple's iOS and Google's Android are unbeatable, so the argument goes.
While some may believe that scenario, one should look much more closely at what a true Microsoft Nokia union could represent. Put simply, it's a very big world out there, beyond developed markets like the US and Europe. And there are still very real growth prospects for handsets and a third mobile ecosystem, too.
What is notable is the lack of attention to two potentially large opportunities the acquisition clearly points to. They lie in two areas: moderately priced mobile devices, and the chance to build a potentially large, coordinated, and powerful new application environment supported and (hopefully) even funded by Microsoft, too.
Here's some background and reasoning why the acquisition not only makes sense, but also sets stage for it to outperform expectations.
Moderately priced "entry level" smartphones do not tend to get a huge amount of attention. Workhorses of the mobile mix, these handsets are typically targeted at consumers in emerging markets like Latin America, Africa, and India, many of whom may have different purchasing power than those in developed markets. In developed markets like the US, mobile operators might see them as well targeted at consumers who cannot afford an iPhone or a Samsung Galaxy.
In the past, these "feature phones" made up the majority of global handset sales. For every top of the line iPhone sold in the US, multiples more feature phones might be sold globally. Nokia built and led this market, too—in the past decade, their "candy bars" and "clam shells" represented the majority of handsets sold by carriers in emerging markets like Africa and Asia. Behind this is an obvious adage: lower pricing means higher volumes, and that formula still hasn't changed very much. It's definitely relevant today, and it's undoubtedly why Apple will launch its new, lower priced iPhone 5c. (And there several other similar competitors, too, like Telefonica's ZTE handsets, which feature the Firefox OS, another aspiring mobile ecosystem.)
But these days, many of these new handsets have features which are actually not so different from their higher priced brethren. Nokia's newest "entry level" smartphones have slightly slower chips, but models like the Windows Phone 420 or Lumia 620 give consumers a smartphone experience at an affordable price.
Taken together, these new handsets may represent the future building blocks for the third ecosystem and they are a critical part of understanding why Microsoft's coming acquisition of Nokia could prove more successful than many think. Put simply, the more lower priced Lumia handsets penetrate markets, the greater the possibility of increased market share for Microsoft.
The other big reason why Microsoft is buying Nokia is the app environment. More than a year since release, Microsoft's Windows 8 has not set the world on fire. While the Win 8 app environment has grown, the emphasis to date has appeared to be more about encouraging publishers to build desktop applications and the development of Microsoft's own Windows 8 advertising business to support it.
While many top applications are available in the Windows 8 app store, it is clear the environment needs both a "long tail" of applications as well as a robust mobile app market counterpart.
Despite potentially enormous distribution potential (some estimates say Windows 8 could be on as many as a billion devices over the next three years), it's still quite early for the new OS. And as some developers and media companies don't yet know what they will achieve or earn from the new environment, so some have understandably resisted building apps for it.
Imagine the difference if Microsoft devotes even a small fraction its considerable cash reserves to fund and support the Windows 8 app development new platform, with mobile app funding as a priority – they're now in a true position to do so as a combined company.
And hopefully, with 30,000 employees coming over from Nokia and years of experience building a mobile business, Microsoft can put some of the considerable content initiatives Nokia built over the years to work in the Windows 8 mobile ecosystem, too. Combining that and Microsoft's own applications – from Xbox to Office, could make for very a meaningful step up.
The Nokia acquisition may not be the answer to every question and challenge Microsoft faces, but it will give Microsoft a solid, high volume mobile handset platform to build from, as well as a new chance at building a truly appealing and robust mobile app environment. It may take a few years for any of us on the outside to tell the difference, but it is clear that a combined Microsoft Nokia is now in a better spot to make a difference.
Seth A. Schachner is managing director, Strat Americas.
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