Friday, February 11, 2011

Nokia announces a new partnership with Microsoft and their stock dips by 15%! Why?!

Nokia announces a new partnership with Microsoft regarding their mobile OS and announces a deep corporate restructuring, and the market welcomes that with an almost 15% dip in NOK stock! 

I just think that from an investor point of view, this kind of announcement looks like a statement of defeat on Nokia's part, as they had 1 amazing operating system 10 years ago (Symbian) which they failed to leverage in front of the Android and iOS competition and are dropping it now in the trashcan, they also started a new project backed by Intel (MeeGo) 2 or 3 years ago and it seems that they are giving it away to the Open-Source community with not much support like in the case of Android. So that might look like another potentially failed project or at least a last attempt to raise by two failures (Symbian and Windows Mobile OS have both failed to counter the rise of Google's Android and Apple's iOS) in the same manner Microsoft tried to buy Yahoo 2 years ago (cf. a quick analysis 

On the second hand, still in an investor's point of view, if Nokia starts "dating" Microsoft, in the short term there is no upside for them, it will take at least 6months to 1 year to clear the current Nokia products' pipeline and start from fresh. Also the kind of restructuring is not a «done» deal till it is done, and carries a lot of uncertainty regarding the outcome. And finally to continue on the outcome issue, the new Windows 7 Mobile has not been in the market for long enough to see a directional trend whether it will catch Android and iOS train or if it will stay on the side like Symbian, Windows Mobile 5, or BlackBerry OS so far for that matter.

But, and there is a big but: Microsoft has deep pockets and can still spare a couple of mistakes before getting it straight, which Nokia couldn't handle anymore. Then, Microsoft Windows 7 Mobile has had a great peer reviews so far, and finally, Microsoft did the right thing by ditching all the old (and so 2000ish) Windows Mobile OS and starting from scratch in a truly definite and innovative way. It was a tough choice (always tough to do radical change and ditch the current user base, just like what Windows XP did to Windows 98), but it was a long-time overdue thing. 

I think that the timing for both of them is a little bit late (should have done it a year ago, as Android registered an 880% increase of adoption in the last year alone), but at least it finally sets the stage for new paradigm regarding Mobile OS. So far, and in the wake of 2000's Smartphone, the business model for Mobile OS was the like of Desktop OS which was to license it for each device and get royalties, or to keep it for its own devices. Apple is still doing the latter, but Android brought a complete game-changing business model, which is to give it away for free, to open-source AND to support it (the latter being the Achilles' heel of the Linux-like OS for computers). Google is making money through ads served when browsing and perhaps a cut when buying apps. 

So for Windows 7 Mobile, giving money to Nokia (which is still a huge device manufacturer) to adopt their software will benefit both companies. On the one hand Microsoft will get an instant spike in their OS distribution and adoption which will keep them relevant among the major Smartphone OS. For Nokia, it finally gives them an edge on the new Smartphone market. They are VERY strong (better than the iPhone by far) on the hardware part, but to stay head-to-head with the Samsung and HTC of this world they need to have a strong OS, which they will with this more robust Microsoft solution. Also that will let them focus on their core business, which is not software development obviously. 

Bottom line, I think on the long run this is the best strategic move they could make. In my analysis of Nokia before, I said they should focus on their core business and embrace Android. Now it's with Windows. Fair enough. The only draw-back I see with that is that it might delay further longer the adoption of a Smartphone-like OS for their "dumb-phones" that they sell by the truck-load in the developing countries, because now they might depend on Windows development pipeline for that. I still stand by my word, and do think they should deploy a scaled-down Android-like OS for their cheap phones, and not wait until the competition does it. Still, if I had money, I'd put some on NOK today at 4PM, and more in the (most probably) upcoming market pull-back.

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