There were more than a few raised eyebrows when Nokia (NYSE:NOK) announced in February that it was releasing a line of smartphones under the Nokia X brand that would run on Google’s (NASDAQ:GOOG)(NASDAQ:GOOGL) Android operating system. Nokia phones have long run on Microsoft’s (NASDAQ:MSFT) Windows Phone operating system and Nokia’s entire smartphone unit was about to be acquired by Microsoft in a deal that had been announced last summer, so what was Nokia doing teaming up with one of Microsoft’s biggest rivals?
The $4.7 billion acquisition of Nokia’s devices and services unit was announced when former CEO Steve Ballmer let the world know he would retire from the company within 12 months. Microsoft purchased Nokia’s smartphone division in order to have more control over the Nokia Lumia line of smartphones, which are the most popular devices running on Windows. Microsoft has suffered in recent years due to not getting on the smartphone bandwagon soon enough and losing out to competitors like Google and Apple (NASDAQ:AAPL). Ballmer has said that those smartphone missteps are his biggest regret in regards to his time at Microsoft, and now the company is hoping that new CEO Satya Nadella can turn its fortunes around.
The Nokia X phones were created to target emerging markets and run on an altered version of Android that supports Microsoft products — including Skype, OneDrive, and Outlook — rather than Google offerings. Microsoft has said that the phones will encourage the use of Microsoft services in emerging markets, which are a key area of growth for the increasingly saturated smartphone industry.
Microsoft’s acquisition of Nokia was completed on April 25, and former Nokia CEO Stephen Elop, who has now returned to work for his former employer Microsoft, spoke about the company’s decision to keep the Android-based Nokia X phones on the market in a question-and-answer session on Monday.
“Microsoft acquired the mobile phones business, inclusive of Nokia X, to help connect the next billion people to Microsoft’s services. Nokia X uses the MSFT cloud, not Google’s,” Elop said in response to a question about whether Microsoft would continue with the Nokia X brand. “This is a great opportunity to connect new customers to Skype, Outlook.com, and OneDrive for the first time. We’ve already seen tens of thousands of new subscribers on MSFT services.
“When we [Nokia] made the decision to focus on Windows Phone back in 2011, we were very concerned that a decision to pursue Android would put us on a collision course with Samsung, who already had established a head of steam around Android. That was the right decision, as we have seen virtually all other OEMs from those days pushed to the side,” Elop said. “Today, we are using AOSP [Android Open Source Product] to attack a specific market opportunity, but we are being thoughtful to do it in a way that accrues benefit to Microsoft and to Lumia.”
Now, new CEO Satya Nadella will be faced with the challenge of guiding the unit to profitability. Nokia once was successful in the cell phone market, but it, too, has been beaten out by industry dominators Apple and Samsung (SSNLF.PK). Some are doubting that Microsoft’s Windows platform could stand a chance against the two companies that soak up more than 100 percent of the profits made by the increasingly saturated smartphone industry. In its last set of earnings, Nokia’s Devices and Services unit posted a loss of $34 million.
The Windows Phone platform has failed to gain traction in a market dominated by iOS and Android. According to recent data from comScore, phones running on Android and iOS make up 93.4 percent of the U.S. smartphone market as of the first quarter of 2014. Microsoft only has 3.4 percent of the U.S. market with its Windows-based phones.
Microsoft could actually stand to benefit from Nokia’s alliance with Android by using a similar tactic used on the tablet front. The company’s Surface tablets have been a notorious disaster since they were introduced, crushed completely by competition from Apple’s iPads. Microsoft recently introduced a version of its ubiquitous Office software for the iPad. Office previously hadn’t been available on iOS products, and introducing Office to those platforms is going to gain Microsoft a lot more Office 365 subscribers through the iPad than it would trying to force anyone who wanted mobile access to Word, Excel, or PowerPoint to get a Surface tablet.
A similar tactic could be used for smartphones if Microsoft decided to make phones running on the altered version of Android. Consumers have been much more willing to embrace Android over the Windows Phone OS, and Nokia already makes an attractive line of Lumia phones. If those phones ran on Android and supported Microsoft products, Microsoft could both benefit from selling more devices and getting more people to use its apps. Only time will tell if the company will eventually break down on the operating system front and team up with one of its worst enemies.
More From Wall St. Cheat Sheet:
- Finally: Nokia-Microsoft Deal to Close on Friday
- Microsoft: Unimpressive Earnings Mean PC Storm Isn’t Over
- The Android-iOS Mobile Duopoly
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