Why Microsoft Should Buy Nokia Instead Of RIM (MSFT, NOK, RIMM, GOOG)

If Microsoft decides to boost its smartphone position with a major acquisition, it should buy Nokia, not Research in Motion.

Some would argue that Nokia isn't really a smartphone maker and Symbian isn't really a smartphone OS, and that RIM would be a much better fit with Microsoft's traditional enterprise focus. All true.

But Microsoft wouldn't be buying Nokia for its software. Microsoft has a fine smartphone software platform--Windows Phone 7 is the freshest take on a smartphone user interface since the iPhone came out in 2007, it performs well on cutting-edge phones, and it's got a well-designed and easy-to-use development platform (albeit with some weird restrictions that Microsoft will probably ease up on next year).

Yes, it's got some functional gaps--multitasking, copy and paste--but Microsoft is racing to fill those gaps now, and by fall 2011 the platform should be functionally on par or very close to the leaders in the field, Google's Android and Apple's iOS.

Microsoft would be buying Nokia for its distribution channels, supply chain, manufacturing relationships, hardware design expertise, and global brand. Instead of having to convince hardware makers to ship Windows Phone 7, Microsoft could ship it, on its own handsets, to a global market that's going to be making the shift from feature phones to smartphones over the next five years.

This would would be a significant change in Microsoft's character as a company--it would be entering the hardware business in a big way for the first time. But that's historically the only reason Microsoft makes big acquisitions--to get into a new market quickly.

Why not RIM? Because RIM's main value is its software and integration with Microsoft Exchange in corporate datacenters--two areas where Microsoft is proving itself quite capable. If Microsoft were going to buy RIM to replace its creaky old Windows Mobile platform, it should have jumped two years ago, before building Windows Phone 7. That ship has sailed.

For hardware, RIM doesn't have anything near the global footprint of Nokia, but would cost almost as much--its market cap stands at $30.4 billion versus Nokia's $38.0 billion. If Microsoft is going to get into the phone business, it should buy number one.

Of course, there's the bigger issue of whether Microsoft should get into the phone business at all. After all, Google managed to get Android to nearly 25% global market share in less than two years with software alone. Can Microsoft really risk alienating its current hardware partners?

It may have no choice.

Google has a two year head start. When Android emerged, phone makers were desperate for a smartphone platform that was somewhat competitive with the iPhone. Android took them most of the way there.

Since then, Android has managed to ship on millions of handsets. Developers have built more than 200,000 apps for the Android Marketplace. If Microsoft waits to grow its share organically, it's going to have a hard time convincing developers to favor Windows Phone 7 instead of going with the much bigger Android platform (not to mention iOS). Lack of apps means less consumer interest means fewer phones sold means less developer interest means lack of apps...and so on, down into the death spiral.

Google also has a different business model than Microsoft. Every time a new socket is created for the Internet, Google is more likely than any other company to earn some money from that socket--despite the rise of Facebook, users conduct an awful lot of Internet searches, and most of those searches are powered by Google. So Google can give its software away and still make money.

Microsoft doesn't have that big, profitable Internet advertising business, and phones don't have many natural ties to Microsoft's core business in desktop PC software--in fact, smartphones tend to replace PCs. For Windows Phone 7, Microsoft gets a paltry $15 (or less) per handset, and perhaps some peripheral benefits like locking enterprises into Exchange (or Exchange Online) for mobile e-mail. That's not enough to justify the huge investment necessary to be competitive in this market. 

It's still early days for Windows Phone 7, but check back in six months. If Windows Phone 7 still hasn't started to ramp up its market share with an Android-like hockey stick curve, Microsoft's last best bet is to start selling phones. And buying Nokia would be the quickest way to go hard into that business.

Microsoft's other option at that point would be to get out of the mobile OS business altogether and focus on pushing other Microsoft software and services--Office, Exchange, SharePoint, Bing, Hotmail, Windows Azure, and so on--to every smartphone platform out there.

Microsoft isn't known for giving up so easily.

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See Also:

• Now Is The Time For Microsoft To Buy Nokia
• Don't Declare Victory For Android Just Yet
• Here's Who Did The Coolest Stuff For The iPhone And iPad This Year