Microsoft and Nokia Send a Weak Signal

Steve Ballmer couldn't leave his successor without a smartphone strategy. That is the real reason he had to buy a chunk of Nokia. Meanwhile, Microsoft's retiring chief executive also brings in a logical candidate to replace himself. But the deal is also essentially an admission of Microsoft's weakness.

The main reason for the deal is that, without more financial firepower, Nokia could never hope to compete. And with their strategic partnership deal set to expire in 2014, and Nokia struggling to justify continued investment in handsets, Microsoft was facing a dilemma. Were Nokia to dial back its mobile ambitions, Microsoft would lose the toehold it has in the smartphone market: More than 80% of Windows smartphones sold are designed by Nokia. Microsoft says it will grab 15% of the smartphone market by 2018, claiming this means the assets it is buying are worth double what it is paying. But that would represent a huge increase in market share. It is hard to see Microsoft’s market share rising fivefold given how badly Microsoft lags behind Google and Apple in attracting developers to make the apps that are critical to attracting buyers of smartphones. In the personal-computing world, a huge amount of Windows-compatible software helped Microsoft establish its dominance. But in the smartphone world, software developers are struggling already to make apps for both Android and iOS. In trying to solve this chicken/egg problem—needing market share to attract developers but needing developers to build market share—Microsoft can deploy its gigantic financial resources. But it will take more than marketing muscle to get real traction.