MarketLine Case Study

Nokia
Acquisition by Microsoft, and what
next for Windows Phones?
Reference Code: ML00013-057

Publication Date: January 2014

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OVERVIEW
Catalyst
In September 2013, Finnish mobile phone manufacturer Nokia agreed to sell its mobile handset arm to technology giant
Microsoft in a deal worth EUR5.4bn (approximately $7bn). The move represents a new phase in Microsofts plan for
Windows phones and the companys modernization attempts.

Summary

Nokia was once the envy of the telecoms industry, being one of the most desirable brands and earning more
than 50% of all the profits in the mobile-phone industry in 2007 at its apex. Within six years it was a fraction of
its former glory. Whilst still one of the largest mobile phone companies in terms of handset sales, it has fallen
behind in the smartphone era, with Android and iOS taking nearly 90% of the operating system share combined
in 2012, systems on which Nokia phones do not operate. The operating systems have both attracted large
amounts of customers and developers in a self-perpetuating cycle. Nokias strength remains in basic handsets,
with declining handset purchases globally. Nokias tendency to choose smartphone operating systems which
fared badly against Android and iOS, such as Symbian and Windows, also did not help their sales in developed
countries.

Microsoft has suffered similar problems to Nokia; it once held monopolist control over the PC market, and its
operating systems are still ubiquitous. However, Microsoft has made a series of blunders in its attempts to take
advantage of the growing mobile devices market. Despite strong revenues from its Windows operating system,
Office suite of business software and Xbox game console, the companys mobile phone unit and tablets have
struggled. Sensing the market trends are now moving beyond traditional computing, Microsoft is hoping to
realign itself as a devices and services provider. By acquiring Nokia, it now has a direct smartphone
manufacturer which can be used to compete. Similar to Apple, it will be an end to end phone built specifically
for the software, as opposed to Android. This gives it many significant advantages over the most populous
operating software in terms of quality and user interaction, which will build higher brand loyalty.

The move has attracted considerable infighting in Microsoft and also may prove a dud. Nokia managed to
produce critically acclaimed phones, but could not translate this into successful sales. Windows phones would
need to significantly improve their sales to break even by the target of 2016. Investors in Microsoft are also at
odds over the future of the company, fearing the move could alienate OEMs or is not truly innovating, merely
mimicking Apples strategy. Finally, Microsoft faces a conundrum on whether to continue pursuing Nokias
presence in traditional handsets, which are still popular in developing countries.

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TABLE OF CONTENTS
Overview ............................................................................................................................................................................ 2
Catalyst............................................................................................................................................................................ 2
Summary ......................................................................................................................................................................... 2
A brief history of Nokias rise and decline............................................................................................................................ 7
The current state of the mobile phones market ............................................................................................................... 7
Nokias recent performance ............................................................................................................................................. 7
Nokias failure in the smartphone market......................................................................................................................... 8
2007-2010: Nokia and Symbians loss at Androids gain ............................................................................................. 8
Windows app store restrictions .................................................................................................................................... 9
Why Microsoft acquired Nokia ........................................................................................................................................... 10
Microsofts transition to device and services.................................................................................................................. 10
Microsoft is still unsuccessful in mobile device technology ............................................................................................ 10
Surface tablet fails to sell and Windows Phones limited sales .................................................................................. 11
Microsoft emulates Apples tactics: OEM sidelined ....................................................................................................... 11
Vertical integration will improve profit margins and the product ................................................................................. 12
Nokia will assist tablet manufacturing too .................................................................................................................. 12
Windows Phones advantages over Android ................................................................................................................. 12
Potential pitfalls for Windows Phones ............................................................................................................................... 13
Windows Phones still trails the incumbents considerably .............................................................................................. 13
Branding problems? ................................................................................................................................................... 13
Windows 7 incompatibility with Windows 8 ................................................................................................................ 13
The problem of Windows phone being a small player in a large market .................................................................... 13
Alienating Microsofts current clientele........................................................................................................................... 13
Forcing consolidation in Windows smartphones ........................................................................................................ 13
Tablet production and computing OEMs .................................................................................................................... 14
Microsofts basic handset problem ................................................................................................................................ 14
Nokia in India ............................................................................................................................................................. 15
Conclusions....................................................................................................................................................................... 16
Vertical integration was necessary, but the future is uncertain ...................................................................................... 16
Appendix ........................................................................................................................................................................... 17
Definitions ...................................................................................................................................................................... 17
Sources ......................................................................................................................................................................... 17
Further Reading ............................................................................................................................................................. 18

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Ask the analyst .............................................................................................................................................................. 19

About MarketLine .......................................................................................................................................................... 19
Disclaimer ...................................................................................................................................................................... 19

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LIST OF TABLES
Table 1: Largest mobile phone manufacturers 2012 ........................................................................................................... 8
Table 2: Global smartphone operating system share in 2012 ............................................................................................. 8

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TABLE OF FIGURES
Figure 1: Global mobile phones market value, USD billions............................................................................................... 7
Figure 2: Nokia Lumia range ............................................................................................................................................... 9
Figure 3: Microsoft revenue for financial year ended June 30 2013, by segment ............................................................. 11
Figure 4: Apple stores compared to Microsoft stores ........................................................................................................ 12
Figure 5: Nokia, Samsung, and HTC Windows phones .................................................................................................... 14
Figure 6: Key markets for Nokia's net revenues, 2012 ...................................................................................................... 15

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A BRIEF HISTORY OF NOKIAS RISE AND DECLINE

Nokia was once the envy of the telecoms industry, being one of the most desirable brands and earning more than 50% of
all the profits in the mobile-phone industry in 2007 at its apex. Within six years it was a fraction of its former glory. Whilst
still one of the largest mobile phone companies in terms of handset sales, it has fallen behind in the smartphone era, with
Android and iOS taking nearly 90% of the operating system share combined in 2012, systems on which Nokia phones
do not operate. The operating systems have both attracted large amounts of customers and developers in a selfperpetuating cycle. Nokias strength remains in basic handsets, with declining handset purchases globally. Nokias
tendency to choose smartphone operating systems which fared badly against Android and iOS, such as Symbian and
Windows, also did not help their sales in developed countries.

The current state of the mobile phones market

The mobile phones market has continued to grow at a compound annual growth rate of 7.0% globally between 2007 and
2011 to reach a value of $150.4bn. It continues to grow as wireless infrastructure improves, decreasing costs. Tariffs are
also deflating, making them more affordable. Wireless technology is preferred at the expense of fixed line telecoms given
its more versatile nature. In developed economies, mobile phones are increasingly being outperformed by smartphones,
handsets with internet and tablet style connectivity. Smartphones are popular in developed economies, but more
affordable smartphone technology will also fare well in developing economies.

Figure 1: Global mobile phones market value, USD billions

180
160
140

USD, bn

120
100
80
60
40
20
0
2007

2008

2009

2010

SOURCE: MARKETLINE MOBILE PHONES INDUSTRY PROFILE

2011

2012

MARKETLINE

Nokias recent performance

Recently, Nokias market capitalization has tumbled and it has been beaten in the developed markets. Basic handsets
remain favorable in developing economies where disposable income and technological infrastructure may be
constrained. Citizens of countries with frequent blackouts or technological breakdowns will find sanctuary in a reliable
Nokia handset. In this instance, Nokias Asha range has been relatively successful in India. In fact, India accounted for
more revenue than the US for the Finnish manufacturer in 2012 (7.5% vs. 6%).

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Table 1: Largest mobile phone manufacturers 2012

Vendor

Sales (million)

Nokia

337.3

Samsung

213

Apple

125.0

LG

49.8

ZTE

35

SOURCE: COMPANY ANNUAL REPORTS

MARKETLINE

Nokias failure in the smartphone market

Nokias failure to adhere to the new smartphone trend meant that it was persistently playing catch up to more innovative
companies, and suffered significant brand damage. Its operating systems and phones were initially beaten back by
Android. The Symbian software was troublesome and patchy, and was eventually replaced by Nokia and Microsofts
Windows phone operating system. Nokia can still rely on its cheaper model sales in developing economies, but since
then has been taken over by Windows, becoming an in-house Windows phone producer. Whilst producing phones, which
may have been critically praised, they failed to win back consumers who converted to Apple and Samsung.

2007-2010: Nokia and Symbians loss at Androids gain

Nokias first smartphones operated on Symbian software, and were relatively successful to begin with. It enjoyed virtually
50% share of the smartphone market in 2007 according to Gartner. However, Nokias smartphones and Symbian
software began to falter in the face of Android and iOS, accused of not being user friendly and prone to bugs. Whereas
once Symbian was borderline universal, by mid-2010 Nokia was the only official operator outside of Japan with it.
Several updates to Symbian still failed to impress consumers.

Table 2: Global smartphone operating system share in 2012

Operating System

Sales (millions)

Market share

Android

497.1

68.8%

iOS

135.9

18.8%

Blackberry OS

32.5

4.5%

Symbian

23.9

3.3%

Windows Phone

17.9

2.5%

Linux

N/A

2.0%

Others

15.1

2.1%

Total

722.4

100%

SOURCE: IDC

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2011 onwards: conversion to Windows Phone

Nokia partnered with Microsoft for its future smartphone products in 2011, itself embattled by the advent of mobile and
tablet technology challenging its monopoly in the PC market. The smartphones, the Lumia range, were met with critical
acclaim, but were still outpaced by its competitors, failing to sell well. Revenues for a time benefitted due to the higher
average selling price of the range, but this did not stem the decline. Both companies were former giants in their
respective fields, and the tie in brand failed to deliver results. Both are associated with a sluggish unwillingness to
innovate, relying on their past successes. This could be considered particularly harmful against the largest smartphone
producers Apple and Samsung, both considered strong innovators. Between January and September 2013, Nokias
sales of smart devices tumbled 15% compared to the same period in 2012, from EUR4.2bn (approximately $5.4bn) to
EUR3.6bn (approximately $4.6bn).

Figure 2: Nokia Lumia range

SOURCE: http://www.nokia.com/gb-en/phones/

MARKETLINE

Windows app store restrictions

Being a latecomer to the market set back Microsoft due to the self-perpetuating nature of the app stores. The more
popular software draws much higher numbers of users and developers. Both iOS and Android have a plethora of apps,
whereas the Windows store suffers from a perception of lack of apps or versatility. Microsoft maintains that many of the
major apps are present, and has even offered incentives from the rest of its considerable catalogue, such as exclusive
games from the Halo franchise. Nonetheless, the company will have to fight hard to attract more entrants.

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WHY MICROSOFT ACQUIRED NOKIA

Microsoft has suffered similar problems to Nokia; it once held monopolist control over the PC market, and its operating
systems are still ubiquitous. However, Microsoft has made a series of blunders in its attempts to take advantage of the
growing mobile devices market. Despite strong revenues from its Windows operating system, Office suite of business
software and Xbox game console, the companys mobile phone unit and tablets have struggled. Sensing the market
trends are now moving beyond traditional computing, Microsoft is hoping to realign itself as a devices and services
provider. By acquiring Nokia, it now has a direct smartphone manufacturer which can be used to compete. Similar to
Apple, it will be an end to end phone built specifically for the software, as opposed to devices using Android. This gives it
many significant advantages over the most populous operating software in terms of quality and user interaction, which
will build higher brand loyalty.

Microsofts transition to device and services

Microsoft enjoys considerable success in the desktop and business software industry, and has consistently grown its
revenues. However, the desktop market is declining, which has made the company nervous about its long-term future.
The explosive growth of the tablet and smartphone market is something the company attempted to capitalize on, but it
could not quite ape the more innovative Apple or Samsung. Broad restructuring is taking place along similar lines to
Apple, in a hope to streamline the companys functions and improve efficiency.
The company will be organized by function: Engineering, Marketing, Business Development and Evangelism, Advanced
Strategy and Research, Finance, HR, Legal and COO (the latter of which includes field, support, commercial operations
and IT). Microsoft will focus its engineering efforts in four areas; OS, Apps, Cloud, and Devices as it strives to make its
Windows, Xbox and Windows Phone platforms integrate fully. The Xbox One encapsulates this, combining many of
Microsofts offerings, such as Skype and the Windows app store, to become an entertainment console rather than purely
video games.

Microsoft is still unsuccessful in mobile device technology

Microsofts revenues from mobile phones (under the Entertainment and Devices Division) are relatively minute compared
to its other businesses. The entire division (including the Xbox gaming console and Skype) recorded revenues of
$10.1bn for their financial year ended 2013, worth 13.1% of total revenues. For Apple, the iPhones revenues were
$91.3bn for year ended September 2013, accounting for 53.4% of the total revenue in that year. Outgoing CEO Steve
Ballmer had hoped to reposition Microsoft as a technology and services provider, seeing mobile technology as essential
to the companys long term survival.

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Figure 3: Microsoft revenue for financial year ended June 30 2013, by segment

Windows

13%
25%

Server and Tools

Online Services
32%

Microsoft Business
26%
4%

Entertainment and
Devices

SOURCE: MICROSOFT 2013 ANNUAL REPORT

MARKETLINE

Surface tablet fails to sell and Windows Phones limited sales

Microsofts own forays into mobile technology have been tepid affairs. The Surface tablet range saw a $900m inventory
adjustment or write down, larger than the sales of $853m for the year to June 2013, reflecting financial failure. 80% of
Windows Phone operated smartphones came from Nokia, revealing reluctance by many manufacturers to adopt the
software. In 2012, even Nokias older software sold better than the Windows range. (3.3% market share for Symbian
against 2.5% for Windows OS).

Microsoft emulates Apples tactics: OEM sidelined

Microsofts archrival is considered Apple. Compared to its competitor, Microsoft systems are usually adopted by original
equipment manufacturers (OEM), preinstalling it on their devices. As of 2013, 65% of the Windows Divisions revenue
came from OEMs, contrasted with Apple, which manufactures much of its own hardware. Apple can leverage its brand to
support sales, particularly as it is a high-end brand. Windows devices by contrast, are fragmented and there are
abundant different models across the price ranges. In new classes of devices, it is hard to get leverage simply through
the OEM model (in particular phones and tablets) due to the lack of brand appeal and fragmented nature of producers.
By acquiring Nokia, Windows will be creating its own products and hoping to compete directly with Apple.
In other areas, Apple also possesses an advantage in distribution, by fronting its own retail presences across the world.
Microsoft has attempted to address this by opening Microsoft stores stocking their own products and the OEM offerings,
but they are currently only in the US and Canada. Other elements of the Apple retail model appear to have been
adopted, experiencing the products and having staff readily available to optimize purchases or assist consumers with
their problems.

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Figure 4: Apple stores compared to Microsoft stores

SOURCE: CULTOFMAC.COM

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Vertical integration will improve profit margins and the product

With the transferal of Nokias 32,000 staff to Microsoft, the company will be able to focus them on tablet and phone
production. The company claims that the elimination of Nokias development and marketing costs would bump the
average profit per unit up from less than $10 to $40. It concedes that the division will not achieve profitability until
FY2016. It will also have complete control over the product, allowing it to shape it as it wishes.
Nokias integration into Windows comes at a time when other smartphone manufacturers seemed unwilling. The current
version of the software, Windows 8, has attracted interest from HTC, Samsung, and Huawei, but the model range is
limited compared to offerings on Android. By integrating a manufacturer into the fold, Windows will have a similar offering
to Apple in both hardware and software designed together.

Nokia will assist tablet manufacturing too

Nokias experience will not only come into play with the smartphones, but also tablets. The Nokia Lumia 2520 is a tablet,
and will help to compete over different price ranges compared to the expensive Surface. There is also space to exploit
phablets, a product somewhere between a phone and a tablet. This includes the Nokia 1520.

Windows Phones advantages over Android

The curated end to end experience now provided by Windows phones may put it at an advantage over the most popular
operating software, Android. There are no software based security problems, and the OS experience is guaranteed
across the price range. There is also an advantage for corporate owners, adopting BlackBerry style abilities to administer
a fleet of Windows Phones easily. Blackberrys current difficulties represent an opportunity for Microsoft to exploit the
market for corporate phones, a potentially lucrative business area.
A sheer variety of handsets is not always a good thing. Consumers can find a product at every price, but they may not
wish to purchase and use the cheapest Android phones, as value is not guaranteed at a higher price. The range of
phones from different manufacturers also means that accessories and cases may not be compatible.
The Android platform is open, meaning manufacturers rarely keep their handsets up to date with the latest version. As a
consequence phones are available with a bewildering variety of operating systems on them. This leads to a variety of
quality of experience. It means not all apps work on all phones, or even offer access to Google Play. There is no unified
experience. Finally, there is a perceived security risk with Android. Access to Google Play is relatively unfettered for

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Android developers, so consumers cannot always be sure that the app they are downloading is legitimate.

POTENTIAL PITFALLS FOR WINDOWS PHONES

The move has caused considerable infighting in Microsoft and also may prove a dud. Nokia managed to produce
critically acclaimed phones, but could not translate this into successful sales. Windows phones would need to
significantly improve their sales to break even by the target date of 2016. Investors in Microsoft are also at odds over the
future of the company, fearing the move could alienate OEMs or that it is not truly innovating, and merely mimicking
Apples strategy. Finally, Microsoft faces a conundrum on whether to continue pursuing Nokias presence in traditional
handsets, which are still popular in developing countries.

Windows Phones still trails the incumbents considerably

Despite becoming the third largest operating system by 3Q 2013 according to Gartner figures, the market share is still
dwarfed by Android and iOS. Windows Phone is now a number-three in the platform rankings, but its 3.6% share is so
small that its biggest OEM, Nokia, is not showing up in the smartphone vendor top five rankings (Huawei beat it at 11.7
million units). To achieve profitability in 2016, Microsoft needs to sell more than 50 million smartphones a year. Last
quarter, Nokia sold 7.4 million smartphones. However, Nokias prospects may not be as bad as they may seem, with
sales growing 123% in Q3 against Q2 2013.

Branding problems?
The power of branding in these markets cannot be discounted. Both Nokia and Microsoft suffered damage in their
reluctance to adopt the smartphone and devices trend, and were penalized for it. Nokias brand was not enough to save
it from severe decline, despite releasing phones which won over critics, but not consumers. The tie in with Windows for
smartphones and Microsofts tablets sales also reflect a loss in the brands power. This could be addressed by combining
both Nokia and Microsoft into a more cohesive marketing campaign under a centralized division, rather than the overlap
and different strategies from two companies. Microsoft already believes cost efficiencies will be made by the move.

Windows 7 incompatibility with Windows 8

The Windows Phone faces backward integration problems from previous versions of the software, which may alienate
consumers who have been using the companys products for longer. Users of Windows Phone handsets with an
operating system older than Windows Phone 8 will never be updated beyond Windows Phone 7.8. There will be
incompatibility with new apps. That may not affect new consumers decisions now, as they will buy a Windows Phone 8
device, but it is worth bearing in mind: although Microsoft says it will update Windows Phone 8 devices, there is no
redress if it chooses not to.

The problem of Windows phone being a small player in a large market

All Windows Phone 8 handsets work well, but they all offer much the same experience, give or take a screen size or
camera spec. There is also a perceived lack of media and apps in the Windows Phone ecosystem. In this respect, the
standardized experience of Windows and relative security against a more open program such as Android may work to its
disadvantage.

Alienating Microsofts current clientele

Ballmers strategy to move into devices and services has not been without controversy. Some investors sought his exit
after failing to be ahead of the curve, whilst others disagree about the new direction. The smartphone market is much
more competitive with lower margins compared to Microsofts traditional product base. The decision to forge ahead with
manufacturing their own hardware will also cause concerns among the OEMs.

Forcing consolidation in Windows smartphones

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Vertically integrating into the smartphones business could have consequences for other manufacturers of Windows
Phones. If the Windows Phone ecosystem fails to attract sufficient numbers, OEMs will be more reluctant to take it on.
Further, by announcing they will be taking their own production, it may lead companies to forge ahead with other
operating software rather than Windows. This argument is disrupted by the evidence. 80% of Windows Phones were
produced by Nokia, and it was failing to attract sufficient attention from other manufacturers. Vertical integration was a
necessary step to ensure the companys survival in the market.

Windows Phone must avoid the fate of Blackberry

The benefits of vertical integration include the entire ecosystem tailored to the phone, which makes the experience much
more accessible. However, Blackberry had a similar set up, and has continued to flounder due to the lack of depth in
their app store. Many key apps, such as BBC News, Vine, Pinterest, and Instagram were missing from the Windows
Store, although this is being remedied.

Figure 5: Nokia, Samsung, and HTC Windows phones

SOURCE: VENTUREBEAT.COM

MARKETLINE

Tablet production and computing OEMs

Ballmer explained the conundrum of Microsofts problem; Nobody ever buys Windows. They buy Windows PCs. By
attempting to move into hardware production, this could put them into competition with their OEMS. PC manufacturer
Acer's chairman and CEO J.T. Wang told the Financial Times that he thinks Microsoft's Surface tablet was "negative for
the worldwide ecosystem" in computing.
The Surface will compete against Lenovo, Toshiba, and other manufacturers for market share now. Desktop PCs are a
much more fragmented market, with branding not as strong, and another entrant into the competitive market via
Microsoft. Some tablets, such as Toshiba Encore, ASUS transformer range, and Sony VAIOs, operate on Windows OS.
Microsoft may struggle to compete in this market.

Microsofts basic handset problem

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Despite the collapse in the smartphone market, Nokia remains one of the largest phone vendors due to its share in basic
handsets. It possessed a market share of 19% in 2012. Handsets are now quite cheap, which is why Nokia has seen a
collapse in revenues against companies such as Samsung and Apple who sell a lot of smartphones. Of Nokias largest
countries in terms of sales, the BRIC bloc and Indonesia constitute top ten places. Microsoft could fail to understand the
psyche of Nokias key developing markets (including India), which could cost it a reliable source of income. Whilst the
handset market is declining and margins are becoming tighter, it is too big of a market for Microsoft to ignore. It is
unknown how it can leverage the handset market given the massive volumes and ever declining prices. A potential
strategy for Nokia would be to continue to sell its handsets in these countries, maintaining brand reputation, whilst
striving towards offering a cheaper smartphone. Focusing solely on high end smartphones may cost Nokia significant
presence in developing economies.

Nokia in India
Nokias presence in India has been relatively successful, possessing strong distribution channels and an identifiable
brand in the Asha range. Like elsewhere, it has suffered attrition with the companys decline but brand loyalty remains
strong. With Samsung now the top player, and local competitors such as Karbonn and Micromax producing cheap
Android smartphones, Microsoft faces a conundrum how to proceed, hoping to close the gap of its products price range
and utilize its web services to retain customers.
Nokia has been in India since the mid-1990s and the country accounted for 7% of its 2012 revenue, while the United
States generated just 6%. Distribution chains include 200,000 outlets, 70,000 of which sell only its devices. One of its
biggest plants is in the southern city of Chennai. Nokia has slipped in India as elsewhere: After nearly two decades as
the market leader it was unseated by Samsung recently, but it remains a strong contender. An option for Microsoft,
analysts said, would be to bundle its services like Bing search, Outlook webmail and Skype, into the lower-end phones
as a way to drive traffic to those services and make the devices more appealing.

Figure 6: Key markets for Nokia's net revenues, 2012

China

8%

India

8%

Japan

7%
6%

54%

USA
Brazil
Germany

6%
4%
4%

Russia
Indonesia
Other

3%

SOURCE: NOKIA ANNUAL REPORT

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CONCLUSIONS
Vertical integration was necessary, but the future is uncertain
Nokias dramatic fall from a companied valued over $200bn in its prime to a $7.2bn acquisition whilst making a $4bn loss
has been profound. The companys reluctance to enter the smartphone market ultimately cost it, suffering substantial
brand damage. Despite producing quality products, the market moved decisively against it, with a perception of
reluctance to innovate and obsolescence. The Nokia Lumia range were very good phones across a spectrum of prices,
but failed to attract sufficient attention. The exclusive adoption for future phones of Windows software also went against
the rampant success of Android, although other phone manufacturers such as Blackberry and Apple successfully
developed their own OS for phones. Despite still being the second largest phone vendor globally, it was soundly beaten
in the smartphone category, with many of its more basic handsets selling in volume, but prices marching continually
downwards.
For Microsoft, its success remained in computing and, more specifically, corporate software, but it failed to crack the
devices market with hesitation by many manufacturers to adopt the Windows OS and the tepid performance of the
Surface tablet. The company recognizes long term trends shifting away from its monopolist position, so has attempted to
invigorate and provide services across the spectrum. The Xbox One signifies this, bundling in many of Microsofts
services into its gaming consoles. Microsofts software manufacturing licensed to OEMs worked, but gave them little
ammunition in the new, high value smart devices market. The decision to acquire Nokia, the largest vendor of its
smartphone OS, will provide it with welcome expertise and capabilities in manufacturing these products. It will also
improve profitability in the market as development and marketing costs are slashed. Phones will now be produced and
designed perfectly for the ecosystem, which will confer an advantage over the dominant Android, which has interface
issues.
The plan is not without risks. The two companies still suffer from consumer perceptions. Whereas Apple and Samsung
are considered cool, innovative brands, Nokia and Microsoft are not. Significant improvements in the brands influence
must be achieved to merit the acquisitions worth in terms of phone sales. Despite an improvement in the fortunes of the
Windows Phones, it is still a small player in a large market, and suffers from problems such as lack of apps in the store,
and manufacturers unwilling to commit fully, making the vertical integration all the more necessary. Microsofts decision
to begin manufacturing tablets and phones has pushed it into direct competition with its OEMs, something they do not
appreciate. The smartphone market is much more competitive than Microsofts traditional monopoly over operating
software for PCs, which has caused concern among some investors. It was, however, a necessary step in the long run
due to the decline of desktops.
Microsoft must also tread carefully with Nokias key clientele in developing markets for traditional handsets. Whilst it
seeks to press Apple in the higher end of the market in terms of value, it will not be granted this luxury in the much tighter
developing markets. Cheap Android phones will perform better, so it must effectively price its range to entice customers
and maintain brand loyalty.
Microsofts foray into the devices and services market has it on the defensive compared to its primacy with desktops. It is
also attempting to regain the initiative by emulating the success of the competitor which outwitted it in marketing and
product innovation, Apple. It must be prepared to forge a separate strategy, as it is unlikely to beat Apple at its own
game.

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APPENDIX
Definitions
Original Equipment Manufacturers (OEMs): manufactures products or components that are purchased by another
company and retailed under that purchasing company's brand name. OEM refers to the company that originally
manufactured the product.
Operating System (OS): a collection of software that manages computer hardware resources and provides common
services for computer programs. The operating system is an essential component of the system software in a computer
system. Application programs usually require an operating system to function.

Sources
Apple Inc. 10-K Filing 2013
http://files.shareholder.com/downloads/AAPL/2848902831x0x701402/a406ad58-6bde-4190-96a14cc2d0d67986/AAPL_FY13_10K_10.30.13.pdf
Business Insider, "Acers CEO warns Microsoft to think twice about releasing the surface tablet"
http://www.businessinsider.com/acers-ceo-warns-microsoft-to-think-twice-about-releasing-the-surface-tablet-2012-8
Financial Express: "Nokia Asha to ashes: Microsoft's emerging market conundrum"
http://www.financialexpress.com/news/nokia-asha-to-ashes-microsoft-corps-emerging-market-conundrum/1165535
Gartner
http://www.gartner.com
Guardian, "Microsoft restructure: Ballmer pins hopes on bringing devices together"
http://www.theguardian.com/technology/2013/jul/11/microsoft-restructure-steve-ballmer
Guardian, "Microsoft says next chief executive won't be announced before 2014"
http://www.theguardian.com/technology/2013/dec/17/microsoft-next-chief-executiveannounced-2014
Microsoft Annual report 2013
http://www.microsoft.com/investor/reports/ar13/download-center/index.html
Microsoft Nokia acquisition announcement
http://www.microsoft.com/en-us/news/press/2013/sep13/09-02announcementpr.aspx
mobithinking mobile statistics:
http://mobithinking.com/mobile-marketing-tools/latest-mobile-stats/a#smartphoneos
New Yorker blog: "Where Nokia went wrong"
http://www.newyorker.com/online/blogs/currency/2013/09/where-nokia-went-wrong.html
Nokia, 2012 annual report
http://i.nokia.com/blob/view/-/2299988/data/3/-/Nokia-in-2012-pdf.pdf
Nokia results 3Q 2013
http://www.results.nokia.com/results/Nokia_results2013Q3e.pdf
PC Advisor, "Android vs Windows: what's the best?"
http://www.pcadvisor.co.uk/buying-advice/mobile-phone/3469008/android-vs-windows-whats-best/
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Reuters, "Microsoft swallows Nokia's phone business for $7.2 billion"

http://www.reuters.com/article/2013/09/03/us-microsoft-nokia-idUSBRE98202V20130903
Tech Crunch, "Gartner: 456M Phones Sold In Q3, 55% Of Them Smartphones; Android At 82% Share, Samsung A Flat
Leader"
http://techcrunch.com/2013/11/14/gartner-456m-phones-sold-in-q3-55-smartphone-android-at-82-share-samsung-a-flatleader/
Venturebeat, "these are the top apps Windows Phone is still missing"
http://venturebeat.com/2013/08/07/these-are-the-top-apps-windows-phone-is-still-missing/
Zdnet, "Microsoft's Ballmer: Surface a tougher bet than Xbox"
http://www.zdnet.com/microsofts-ballmer-surface-a-tougher-bet-than-the-xbox-7000024408/

Further Reading
Nokia Case Study: Struggling in the Smartphone Age: Marketline Case Study
EU Telecoms: Will Connected Continent save the sector? : Marketline Case Study
Nokia Corporation: Marketline Company profile
Android: From Start-Up to the World's Leading Smartphone Platform: Marketline Case Study
Microsoft Corporation: Marketline Company Profile
Mobile Phones: Marketline Industry Profile

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