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Can the Nokia deal save Microsoft?

25.02.2011
Microsoft's recent deal with Nokia will put Windows Phone 7 on millions of Nokia mobile phones around the world. Microsoft in turn will shower billions of dollars on Nokia in marketing, engineering and other costs. The companies hope that together, they can make inroads into the mobile market that has increasingly become dominated by Apple's iPhone and Google's Android. Some people have argued that combining the forces of two companies that have been failing in the mobile market will add up to little more than failure times two. But the deal may well save Microsoft from a slow-growth future. The partnership is one of the most important that Microsoft has made in recent years -- so important, in fact, that the billions of dollars it's spending may well save the company and ensure that its technology remains relevant, and its products stay viable, well into the fast-changing mobile future.

You could easily argue, of course, that Microsoft doesn't really need saving. After all, in its most recent earnings statement, for the second quarter of its fiscal year, that it took in $19.95 billion -- the highest revenue ever for that quarter. Net income was a healthy $6.63 billion. That doesn't sound like a company in need of saving.

But a closer look at the numbers shows that the revenue was bolstered primarily by yesterday's technologies, not tomorrow's. Leading the way was Office, with revenue growth of 24%, "a huge quarter, exceeding everyone's expectations" according to Kevin Turner, 's chief operating officer. Sales for mobile and Windows Phone 7 weren't even broken out, a clear sign they were lagging. And reports that came out after the earnings report confirmed Windows Phone 7's problems with gaining traction -- , and those were to retail stores, not to consumers. By way of contrast, says it activates 300,000 devices every day.

It's true that without having a successful mobile operating system, Microsoft will still survive. Windows isn't going away anytime soon. Nor is Microsoft Office, server technologies and other successful core products.

But none of those technologies are high-growth. If Microsoft relies solely on them, it will eventually become the tech equivalent of a utility company, reaping profits primarily by providing underlying infrastructure. The best engineers, designers, marketers and other creative professionals will look elsewhere for work, leading to a further spiral downward.

In a future that belongs to mobile, Microsoft would not be able to maintain high growth without Windows Phone 7 becoming a success. That's why the Nokia deal is so important to Microsoft. With a single contract, Microsoft ensures that it will become an important mobile player, not the afterthought it is now. Although -- where it once had more than 50% market share -- even in its weakened state, it has a 29% market share, according to Gartner.