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Microsoft's Nokia Buy: Consumer Chase Is On

Sep 03, 2013 (07:09 AM EDT)

Read the Original Article at http://www.informationweek.com/news/showArticle.jhtml?articleID=240160703


Microsoft's courtship with consumers is far from over. Now that the company is set to acquire Nokia's Devices and Services business, there can be little doubt: CEO Steve Ballmer might be retiring, but the "one Microsoft" plan on which he reorganized the company is just getting started.

Microsoft's attempt to woo consumers has been hotly contested in the days since Ballmer announced he will be stepping down. The anti-consumer argument is simple: Because Microsoft makes most of its money from the enterprise, it should focus on its enterprise products instead of chasing Apple and Google in the mass market. When it was revealed over the weekend that activist hedge fund ValueAct will soon have the option to gain a seat on Microsoft's board, such arguments seemed destined to grow louder.

The Nokia acquisition changes that. As InformationWeek's Eric Zeman pointed out, the deal takes a page from Apple's playbook in that it will allow Microsoft to produce Windows Phone devices that more cohesively blend hardware and software. In a research note, Frost & Sullivan research director Adrian Drozd drew similar conclusions, writing that "Microsoft can use Nokia to really drive innovation on the platform, as Google is doing with Motorola."

Drozd said Microsoft needs to keep other OEMs such as Samsung and HTC in the Windows Phone ecosystem, suggesting Microsoft should use Nokia to set a standard toward which partner manufacturers can aspire. That sounds good -- but it's the same strategy Microsoft chose for its underperforming Surface tablets, which have done little to stimulate interest in Windows 8. Skeptical shareholders will surely wonder why Microsoft is charging forward with a strategy it hasn't yet shown an ability to execute.

[ What about Microsoft's struggling tablet business? Read Microsoft Needs 3 Surface Tablets: 3 Reasons. ]

In an interview conducted before the Nokia announcement, Forrester analyst David Johnson offered insight into Microsoft's consumer-centric motivation. "[Microsoft has] to appeal to people who have work to do. Consumers get up in the morning and become employees," he said, adding that the company "absolutely needs consumers."

Indeed, on the day he announced his retirement plans, Ballmer made similar remarks in an interview with ZDnet.

"If you're going to be in email, you're going to be in email. You can't say, okay, I only want to be in enterprise email," he said, stating that the alternative is to "be like Oracle and not participate in certain high-value activities."

What kind of "high-value activity?" According to a recent Gartner study, many employees would continue bringing iPads into the office even if given company-issued Windows 8 hybrid devices. The subtext is that if consumers enjoy using a device in their personal lives, they'll find a way to use it at work -- even, in many cases, if the device isn't part of the company's official device policy. There will always be a need for enterprise-focused technology companies, but consumerization is real, and Apple's example has weighed heavily on Microsoft's goals. As Gartner analyst Carolina Milanesi put it in an interview with InformationWeek in April, if Microsoft gets the consumer, it will get the enterprise.

But can Microsoft get the consumer? At face value, the company's recent agreement with ValueAct speaks to this question. The hedge fund owns a little under 1% of Microsoft's outstanding shares and reportedly opposes the company's move to make its own devices. Under the agreement, the Microsoft board will receive regular input from ValueAct president Mason Morfit, who will have the option to join the board in 2014.

ValueAct's involvement shows that Microsoft is cognizant of shareholder unrest -- but the company is still a long way from jettisoning its consumer business, a la IBM. That sort of move would mean embracing a more targeted and modest future than anyone at Microsoft, current board members included, seems to want.

Indeed, after Ballmer announced his intent to retire, board member John Thompson endorsed the outgoing CEO's belief in an ecosystem of devices and services that spans the consumer and business spheres. Microsoft VP of corporate communications Frank Shaw even took a turn for the poetic when he defended the company's direction.

"We believe that technology is the key to unlocking human potential in all its forms, and that our job is to make it as broadly accessible as possible," he wrote in a blog post that reprimanded critics for underplaying Ballmer's considerable success. "[We believe] people don't stop being people when they go to work or stop making things happen when they go home."




And though some investors question Microsoft's consumer emphasis, others see potential. Richard Cook, whose capital management firm owns Microsoft shares, is one example. He told Bloomberg that the "genius" of the Xbox is that it allows the company "to put a Microsoft machine in everybody's living room."

But the question remains: If Microsoft is dedicated to chasing consumers, how will the company reverse its recent misfortune?

If Nokia's reported plan to launch a Windows RT 8.1 tablet at the end of September is any indication, Microsoft's purchase won't turn the tide on its own. Allegedly codenamed Sirius, the device is expected to boast competitive specs and components, but its core differentiation is still essentially the same as the disastrous Surface RT's: Sirius will be a laptop-like tablet. That tactic didn't work the first time, and it's hard to see consumers caring about Windows RT 8.1's additions, such as Outlook access and more extensive UI customization. Sirius' alleged $499 base price certainly won't help -- not with a new, identically priced iPad expected to hit the market around the same time. Sirius should be better than the Surface RT in every way, and it might sell better. But, is incremental progress enough to justify the "one Microsoft" vision?

Consumers aren't the only market for such a device, of course. An ultra-mobile device that supports Microsoft Word and Outlook might be attractive to schools and businesses, too. Some commercial customers have already embraced Windows 8 and Windows RT for their tablet-PC convergence, and the updates should attract new customers. But Forrester analyst David Johnson said enterprise customers still aren't interested in Windows 8.1. So again: How much growth will be enough?

The Nokia purchase supports that Stephen Elop, the company's CEO, is a leading contender for Steve Ballmer's job. But his appeal is predicated on advancing the course Ballmer has laid out. It's possible Microsoft devices will continue to progress slowly, and that enterprises will continue to resist Windows 8 and its consumerized UI. If these scenarios play out, the next CEO, whether Elop or someone else, might be forced to tweak aspects of the "one Microsoft" game plan.

Hoping to boost adoption of its own hardware, Microsoft has withheld Microsoft Office from iOS and Android, for example. The tactic hasn't worked and, though it might modestly boost enterprise sales as Windows XP winds down, the aforementioned Gartner study suggests iPads will nonetheless continue flooding into the workplace.

Steve Jobs once famously said, "If you don't cannibalize yourself, someone else will," and Microsoft should heed this advice. Microsoft won't win consumers by holding features hostage; it will win by delivering a product that people want to use -- and with Nokia's resources now in the fold, Microsoft has shown a willingness to gain the resources to do so. Now it has to execute.

Learn more about enterprise mobility and BYOD by attending the Interop conference track on Mobility in New York from Sept. 30 to Oct. 4.