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Who's buying whom?

When a prosperous company buys a struggling company you have to wonder what they’re really buying.

Here’s how to think about it. A company is defined as the sum of three values: resources, processes and priorities (RPP). Everything of value can be classified into these three categories.

When one company buys another it’s the equivalent of one set of RPPs trying to engulf or swallow another set of RPPs. The simplest (naïve) interpretation is that an acquisition is the purchase of Resources in terms of customers, sales, profits, etc. It might be of assets like employees, intellectual properties, brand etc. I say this is naïve because Resources are the easiest to value because they can be measured and valuing only what can be measured while ignoring what can’t be measured is deeply mis-pricing.

So most people look for the “R” value or the value of Resources in an acquisition. It’s may be naïve but it is what markets typically value because it’s what they can price. But what happens when the “R” is flimsy or fleeting?

The answer has to be that it’s  the processes or even priorities which are valued by the acquirer.

These are difficult to value which, as I’ve argued in The Innovator’s Curse, is why they are not reflected in a share’s price. When there is a price paid for these fuzzy assets, they are often interpreted as a “premium” to the market price. But that may not be the way a buyer sees it.

When buying a set of Processes, a buyer may see a bargain because their costs for building a similar process could be enormous, even infinite. In the case of Nokia, the process of building hardware may be infinitely valuable to Microsoft as they have had dreadful luck doing it themselves. But they’re seen as value free to the market because it seems that there are many others who are building hardware.

The trickiest thing to perceive though is the value of a set of Priorities. Priorities are the answers to the “Why” question as much as Resources are the answers to the “What” and processes are to the “How.” If you were to think in terms of software engineering Priorities are the “Specifications” where the Resources are the data and Processes are the algorithms. They determine the direction and reasoning of why a company even exists. If you have bad specs, it never matters whether the algorithm is efficient and you have all the data: you are building the wrong thing.

Acquiring Priorities is also fundamental in that they are usually exclusive. A company typically only has room for one set. If there are conflicting priorities, they need to be sorted out else the company can end up in a state of internal conflict and dysfunction. So if you’re acquiring a set of Priorities, it’s likely that you’ll have to discard your own. It makes most sense when a company which might otherwise be prosperous needs to change direction.

So, in a way, an acquisition of Priorities is almost a reverse acquisition. The acquired is actually “buying” the acquirer. The acquired company’s Priorities (and hence Processes and Resources) become the guiding principles in the acquirer. It’s what happened when Apple bought NeXT and may have happened when Disney bought Pixar.

Some companies are “Resource-heavy”, some are “Process-heavy” and some are “Priority-heavy”. Great companies tend to have great sense of priority. They may also have greatness in the other asset classes but it’s rare to find a great company without a great sense of purpose.

So the question for the Microsoft Nokia deal is what is Microsoft buying?

Resources? Sure, there is IP and a team. But the chances are that not all the team members will be kept on. See what happened to Motorola after it was acquired by Google.

Processes? Absolutely. Microsoft needs device development processes desperately.  They may seem a commodity but it turns out that running great hardware businesses is hard, very hard.

Priorities? Here we have to pause. To acquire Nokia’s priorities means acquiring its business model; its belief system. Perhaps they will be discarded and they’re not valued. Perhaps, as is often the case, the acquirer becomes allergic to the new priorities.

But Microsoft has made it clear that they are now a “Devices and Services” company. As much as Apple changed its name to exclude “Computer,” Microsoft is almost changing its name to exclude “software”. It will still make software, to be sure, but for it to get paid it needs to integrate that software into hardware and services.

My first thought on this is that Nokia’s priorities are not sufficient for the company that Microsoft wants and needs to become, but there are some priorities which are necessary and which it values.

It may be too much to say that with respect to Priorities, Nokia acquired Microsoft, but insofar as Microsoft is having to transform its business model, what Nokia devices brings is an integral component of the new.

 

  • samrzrkat

    It looks like Nokia sold its Devices & Services division. The acquirer is secondary in this transaction.

  • Ilari Scheinin

    What I was a bit puzzled with is how Ballmer, who has already been fired (or call it whatever you want in PR speak), was allowed to finish an acquisition this big. (Nokia said it was initiated by him.) I’ve been weighing two possibilities: That it was indeed a step in what was considered the right direction, but simply too late to let him stay. Or alternatively, it was a condition for letting him (and Microsoft) keep face, and soften the wording of his firing. I’m leaning towards the latter.

    • Asad Quraishi

      He may have initiated it but it is in line with the new direction and I’m certain both the direction and acquisition had full support from the board. Even though both are in the right direction I suspect that a) either he was ‘forced into it’ or b) he took too long to make the move.

    • obarthelemy

      I’m fairly sure spots for Nokia’s top management in the upcoming reorg were a big part of the deal, so Ballmer’s exit (and the ensuing reorg) and Nokia’s buyout meshed nicely, hence were done at the same time.

    • marcoselmalo

      It would be interesting to know how everything unfolded. This acquisition and MS’s new strategy didn’t happen in isolation, nor Ballmer’s retirement announcement. If Elop takes the MS helm, that will clarify a lot of questions, making it possible that this was a condition of the transaction. The 12 month (or less) retirement window, ostensibly for the purpose of finding a new CEO, makes sense as well. (Additional data: it’s been reported that the first people outside of MS that Ballmer talked to after making his decision to retire were Elop and whatsisname (the chairman of Nokia). Not proof that it was a condition, but certainly suggestive that Ballmer stepping down was agreeable to MS.)

      I also have a suspicion that “Stack Ranking” is not going to survive both the re-org and the acquisition.

      Lots to think about here.

      • Walt French

        The more I put myself into the role of a Board member (my wife is on the team selecting a new head for her organization), the harder it is for me to put Elop at the helm of Microsoft.

        Track record of getting everybody to pull together is pretty miserable. The Burning Platform was a fiasco—it failed to mobilize the troops the way that Alexander the Great succeeded by burning his ships. His ability to transform a stodgy, stuck-in-its-ways workforce is invisible. His ability to craft a clear vision for his company, line up all the parts and force execution, zippo.

        All he has is first-hand experience in selling phones, and even there, what did he do rather than keep the chair warm?

        I’m sure he’s a very capable, bright guy — most everybody at his level has been selected for drive, focus, quick thinking, etc. But he just doesn’t have credibility to head a firm that has major internal and external challenges.

  • http://iixn.pl/ majgr

    “It may be too much to say that with respect to Priorities, Nokia
    acquired Microsoft, but insofar as Microsoft is having to transform its
    business model, what Nokia devices brings is an integral component of
    the new.”

    - it may be the case since Microsoft was always losing(money) in consumer space: XBox, Surface, Bing. Corporate side of Microsoft is strong enough(Server, Azure, Tools). New fights will be between consumerization and corporatization of Windows&Office.

  • Accent_Sweden

    Microsoft is looking for a clean slate and so may be open to adopting Nokia’s priorities. The problem could be that Nokia has abandoned too many of its own priorities over the last few years and replaced them for Microsoft’s priorities. In effect, Microsoft just acquired itself. Talking about eating its own tail.

  • obarthelemy

    MS are being unimaginative and blatantly aping Apple (full ecosystem control) instead of doing like Google, and instead of going the ownership of the whole market, just taking a small direct stake in it.
    We already know which model works best for grabbing share.

    • Kfir

      Are you aware that Google bought Motorola

      • obarthelemy

        Are you aware that Motorola is a minor Android player, while Nokia is pretty much the only Windows Phone player ?

      • marcoselmalo

        “Are you aware that Motorola is a minor Android player . . .”

        Which is why Google paid $5 Billion more for it than MS paid for Android.

      • obarthelemy

        i fail to see how price paid is relevant to this thread ?

      • Sprewell

        I think his point is that Google paid double for that “minor Android player” than what Microsoft is paying for Nokia today, “the only Windows Phone player” or not. I agree with you that it would be better if MS would stick to software, but they’ve been trying that and it hasn’t worked. MS thinks that having a mobile manufacturer in their pocket will always allow them to stay in the mobile game. Given their failure so far, I can’t fault them for thinking that and perhaps it could be a way for them to leverage themselves back into the software licensing game.

      • obarthelemy

        That’s not the point though. Google paid a lot for Moto, but they never wavered from their OEM and licensing strategy, and emphatically signaled that. They got Moto for the patents, and maybe to try and stem the rush downmarket (the Moto X is arguably the most innovative Android phone this year). I’m not sure Google is committed to the manufacturing part of Moto for the long term.

        MS just bought probably 95% of the Windows Phone market, that’s a wholly different move. If I were any other WinPhone OEM, I’d need a big fat incentive to stay in that game. It also signals that MS want to persist in that market, and since the results are not dismal right now, and MS will try anything (mainly price and advertising… maybe they’ll even come up with a good ecosystem, eh ?), we’re in for a few fun years.

      • Sprewell

        That is the point you originally made, that Google’s acquisition was okay because it only bought “a small direct stake” in the smartphone market. We’re just pointing out that all Microsoft has done is buy an even smaller stake in that market. Microsoft has also “emphatically signaled that” they still want OEM licensing, look at Myerson’s comments yesterday. Whether their signal is as credible is a different story. ;)

        As for Google buying a small part of the Android market through Motorola or Microsoft buying “probably 95% of the Windows Phone market”- I’ve heard more like 80%- that’s just playing games with the numbers, because Android had already succeeded while WP has negligible market share. The dollars spent is a better metric, as we’ve pointed out. WP OEMs already have a big incentive to stay on board: they can’t license iOS and Android is the only option right now. They want more options so that Android doesn’t become a monopoly, which is why Samsung is working on Tizen and why they’ll always give WP a shot.

        I agree that all this technology upheaval is a lot of fun, I imagine this is what it was like during the Unix workstation wars two decades ago. :)

      • obarthelemy

        Own ecosystem share for own handsets:
        Apple 100%
        MS 87% (http://blog.adduplex.com/2013/08/adduplex-windows-phone-statistics.html)
        Google: 1.9%

        Are you arguing other WP OEMs’ share will suddenly start to rise *now* ?
        Dollar spent is *not* a better metric. MS just took over their ecosystem, Google never even got close. MS bought an OEM to make phones, Google bought mostly patents.

      • Kizedek

        Google also bought the capability to introduce their own signature phones to showcase and ensure the services, so that when the fragmentation, lack of control and poor direction of Android is shown for what it is and comes back to bite them in the butt, they will have more than diddly-squat, which they almost have now.

      • obarthelemy

        Look at it that way: the fragmentation issue was exactly the same back in the Mac vs Wintel days. Guess who consumers chose en masse ?

        Still no argument to support your initial claim ? More smoke-blowing ?

      • inputmethod

        Input method.

      • Kizedek

        The fragmentation issue was not at all the same. MS exerted a LOT more control and management over Windows than Google does over Android. There was no Windows equivalent of Amazon and Baidu, etc.

        You are conflating that both generally followed similar “open” licensing models, without realizing that both companies can still make their individual mistakes, or that Android can make new ones.

      • obarthelemy

        Still no argument to support your initial claim ? More smoke-blowing ?

      • Kizedek

        Mostly, I was pointing out what you have since acknowledged: Windows Phone / RT is more different from Windows than iOS is from OS X.

        To me, that is significant. It is an acknowledgement that Windows doesn’t have what it takes to adapt itself to various environments and paradigms… from either end, desktop or mobile.

        In reality, they probably have little in the way of “parts” to choose from, whether from their mobile or desktop efforts. In that sense, few of their choices are going to be the right “parts” to carry them forward for the future.

        In order to make the transition to a Post PC world (something they finally seem to acknowledge in their effort to reorganize, etc.) I think they should have started ditching their traditional mobile efforts altogether when they saw the iPhone 6 years ago. To that end, they should have made significant changes to their core OS 12 years ago. But they would have had to contract their business in order to do so; now, they have no choice.

        Instead, it is interesting that in Mobile, MS has come up with one failed mobile platform after another (CE, Kin, Zune, Windows Phone 6, 7 and now Windows Phone/RT). I am not sure that just adding a quirky but funky UI on top and sharing that with desktop computing is enough. It is certainly not enough to show everyone their need for Windows and Office or any other MS product.

        It is ironic to me that MS sells its mobile efforts as Windows Everywhere, when it is in fact so different. And the jam-up of the two into Windows 8 is extremely compromising for a company that predicated its core businesses on compatibility and interoperability. So much so, that they are now facing a switch to services.

      • obarthelemy

        No, you were pointing out that WP is a bad OS, that it is badly designed and implemented.

        I’ve heard lots of bad things about WP: the UI is not as good as in the commercials, there’s a dearth of apps and even more of good apps, devs can’t eke a living out of it…

        What I emphatically haven’t heard is devs complaining about the OS itself, nor about the toolchain.

        The situation is not as streamlined as it could be (4 broad APIs: WP, WinRT, Win8/Metro, Win8/Desktop; 3 distinct environments: Phone, RT, x86) but as a standalone OS, WP shines, especially with its low-end requirements, and doing cross-platform dev is not a lot of work (mainly, the UI). WP supports both managed and native code, which is nice. No major APIs are missing.

        The fact that MS have been dabbling in Mobile for a long time cuts both ways: yes, they have been unsuccessful until now. But as a result, they have experience and know-how, and hopefully now that they’ve dropped (or reversed…) their attempts at putting a Desktop UI on mobile, they can capitalize on those.

      • Kizedek

        You want to sound like you have buckets of deep technical insight that you are dispensing with every nonchalant phrase, and you press for white papers from others; but your arguments are no different in quality or nature than mine. For example:

        You “haven’t heard devs complain”? All these devs who “can’t eke a living out of it”? Or, maybe you mean all the devs who focus on iOS first?

        “WP shines“? In your eyes.

        “As a standalone OS”? Which is why they had to back it up with elements of Windows 8 in Surface RT, and it still failed?

        “Unsuccessful until now”? They are successful now? I must have missed the memo.

        Etc., etc….

        Obarthelemy, I must ask you — can you provide some back up for at least a few of the startling assertions that you litter this website with?

      • obarthelemy

        Still blowing smoke, heh ?

      • Sprewell

        I’m saying that OS ecosystem share is irrelevant. MS bought 2% share of the smartphone market from Nokia while Google bought 1% from Motorola. Both are small stakes, but you criticize one and not the other.

        You do raise a somewhat valid point that Microsoft buying such a big part of their OS share could be threatening for other WP OEMs, but given the competitive dynamics I mentioned above, that’s not much of a concern. All the successful Android OEMs want an alternative to Android, WP is the de facto alternative. It would be nice if they could license QNX, but that hasn’t happened.

        Whether WP share rises or not subsequently is subject to a lot of other issues, like the continuing intrinsic technical quality of the WP OS itself and how Microsoft deals with potential app devs, so that’s a separate issue. But I suspect the number of WP OEMs will not drop significantly because of this move, which appears to be your big criticism.

      • obarthelemy

        I’m not sure current WP OEMs are free to exit the market :-p I’m sure those were free, did.

      • Walt French

        Motorola was a failed company more surely than Nokia is. The fact that they had some salable assets lying around, great. But Google has managed to do essentially nothing with their supposed business other than generate a little bit of “Made in USA!!!” jingoism (which I suppose @obarthelemy is especially immune to), which is unsurprising given how completely Google tore it up after the deal.

        The patents part, the nominal reason for buying Moto, was also a PR/propaganda extravaganza, meant to reinforce the view that Apple and Microsoft were unfairly exploiting the weak hands of individual Android licensees.

        (Never mind that Google was happy to avail itself of Microsoft’s long-standing promise not to sue any open-source effort that gave away its software, which is the likely reason that Microsoft only went after the OHA handset makers.)

        Michael Mace, another fine commenter, notes today that “the” three big firms are now all hw/sw integrated. But neither Microsoft nor Google are big in hardware; they are running money-losing hobbies when it comes to their smartphone manufacturing.

    • http://www.noisetech-software.com/Home.html Steven Noyes

      Google bought Motorola.

  • Chui Tey

    A lot of interesting ideas there.

    Nokia’s history has many parallels with Microsoft. Having ridden a wave earlier, its growth had stagnated, and stopped producing innovative products when it in fact pioneered many new ideas. Their organisational structure was a mess, and product development pipeline was broken.

    Elop made a lot of people unhappy and unemployed when he slashed the R&D department and rationalised the product lines. It clarified Nokia’s consumer messaging and focussed relentlessly on where the puck is going. Microsoft has bought Nokia at the right time when some of the marketing is starting to pay off.

    Perhaps Microsoft needs to do a spring cleaning, the same way as Nokia had one. Presumably the team that built Surface is now in danger of losing their jobs. If this happens it would be a major exercise in accountability at Microsoft that hasn’t happened for many years.

    • obarthelemy

      I wouldn’t fault the Surface team that much, they got unanimous thumbs up on the hardware (though pricing was unrealistic, and size was quite tone-deaf).

      Shouldn’t MS fire… their Windows team ? Oh, wait…

  • Luis Alejandro Masanti

    It is interesting as it appears that “everybody” is following Apple’s model.
    But, are they following it?

    Apple has an integrated soft-hard-servicies-sales model, with control but not ownership of production facilities (although ownership of tools).
    Samsung has everything except (for the time being) full control of its own OS (Tizen is comming).
    Google/Motorola has everything except (maybe) a strong presence in POS.
    Microsoft/Nokia has everything plus full control of the production (I think).

    Will the non-production-ownership make the difference?

    (Maybe I’m totally wrong in the details of all the companies)

    • Walt French

      Your observations are doubly interesting to me in that the Christensen model is predicting an increasing shift towards commoditization of the industry at this point.

      Control of your destiny by ownership of production, IP, distribution…all should supposedly be of very little value. Which I will comment on under the podcast thread. (tl;dr: commoditization removes the advantages of companies’ “internal markets” and exacerbates their inflexibility.)

    • obarthelemy

      I’m seeing a big sale of Nokia’s assembly lines in the near future ?

    • Sprewell

      I was thinking along similar lines but I would put it a bit differently. The three axes for me are software, hardware, and services, ie over the network. Apple is great at software, decent at hardware- the iPhone hardware is outdated at this point, with only the CPU/GPU considered cutting-edge- and bad at services. Some may count iTunes as a successful service for Apple, but that is the only one and not very hard to run. Google is decent at software, though it makes them no money, didn’t really do hardware until the Motorola acquisition, and great at services, search in particular. Microsoft is good at software, particularly enterprise, doesn’t really do hardware, and not very good at services.

      The reason I listed all their strengths and weaknesses is that while all three are trying to build completely “synergized” platforms with all three legs to the stool, none really does more than one or two well, not to mention all the other wannabes like Samsung or HTC that keep flailing around with their own pathetic attempts. I suspect that nobody can, as each axis likely requires different cultures, so all are doomed to fail at these grand plans. But it is funny to see them try. :)

      • obarthelemy

        MS are actually really good at what little hardware they do. Their peripherals and their tablets are top notch, the Zune and the xbox were good (RROD notwithstanding, we’ll give them a pass on that).

      • Sprewell

        Sure, I’ve heard good things about their keyboards, but all their hardware combined is a small business. MS has lost billions on the Xbox, as good as it might be, I don’t think they should get a pass on that.

      • mjw149

        The issue is not hardware quality, because they have the money to spend to make impressive stuff. Razer makes impressive stuff, too, you know, it’s not a huge trick.

        It’s nailing the business model and iterations and consumer sat that gets you (xbox RRoD applicable here). Apple can do that, others have not been able to – Sony at times. That’s the difference between a BMW and a GM. AND that’s the difference between Nokia and the Surface team, you know?

      • Walt French

        …and I’ll speak up for Google’s software talent—good enough that it could crank out a credible Android product with an attractive UI by the Froyo release in 2010. That was about a good year faster than the incumbent phone OS provider Microsoft was able to do; faster still than RIM; and Nokia was just flailing around before Elop pulled the plug on their homegrown efforts and jumped off the burning platform.

        Yes, I saw that you noted that Google makes no money from software. But what they did was maybe even more valuable: crippled their only real competitor (for services, which you correctly note is Google’s bread and butter) who depended on it.

      • Sprewell

        There is no real market test for “Google’s software talent,” since we don’t know what their market share would be if there were a price attached to Android or Chrome. MS and Apple have to pass this market test everyday, Google doesn’t. I think both Android and Chrome are decently engineered products given their horrible underlying architectures, ie java and the web stack. If Google were really so good, they wouldn’t have based Android apps on java, which slows down Android to this day. There’s a reason why Microsoft has backed off on C#- MS compiles all WP apps now- something Google still hasn’t realized.

        As for Froyo coming out in 2010, Google bought Android in 2005. We don’t know what kind of resources they poured into it in those five years, could have been much more than Microsoft or RIM or Nokia, plus it’s easier when you’re starting from scratch. That doesn’t discount the software chops of Google’s engineers, but I question that Froyo was “cranked out.”

        As for crippling Microsoft in mobile software, there is a question if MS would have failed anyway, given it’s Apple that initially demolished Windows Mobile share, not Android. Android certainly did its part later on, but that arguably only strengthened Apple’s relative position even more, so it’s questionable if it’s a net win for Google. I’d argue that it isn’t, that Android is a collapse waiting to happen, because it’s flawed technically and doesn’t have a business model.

      • Walt French

        Regards Microsoft: Google absolutely set out to kneecap Microsoft when they bought Android. But yes, it was Apple that killed WM.

        Apple, and the fact that by the time WP8 was a nice phone OS, consumers had a range of choices and didn’t need Microsoft any more.

        Microsoft still has only barely responded to Google’s utter destruction of the market—the market wherein a software shop sells an OS to a phone manufacturer—the market where Microsoft made its money in mobile.

      • Sprewell

        It may take a while for Google to give up on Android, but it all depends on how quickly Apple goes downmarket. Apple has more than $150 billion in cash, the 5C might be the first move to spend some of that money and capture the midmarket. Google could hang on to Android at the low end for a long time, as Apple likely will never get into that low-margin market and Google may not spend and certainly doesn’t make that much money off Android anyway. But if Apple takes over the midmarket, they’ll have 50-60% share of the smartphone market and 100% share of the profitable segment of the market, ie the part that actually matters. That will essentially be a collapse for Android.

        As for Samsung, I’m not sure how they ever became the big success they are, because other than the blanket marketing, their hardware isn’t that great-looking and their software customizations of Android are fairly kludgey. Maybe they will keep churning out high-end hits like the S4 and Note, maybe they don’t, maybe they switch to Tizen, who knows what will happen with them.

        I actually think the Microsoft approach is the best approach for the long-term: license your OS at a fair price and try to capture the mass middle. They simply seem incapable of executing it, while being buffeted by Apple on the high end and Android on the low end. Perhaps it will be Apple who pulls off the move downmarket this time.

      • macyourday

        Sucking the oxygen out of the devices market by taking the middle market as well as the top end could cripple all the other manufacturers (even more than they are now) and quite possibly critically wound samesung’s profit base, if they actually have one. This might be why apple is prepared to take a margin hit by taking on lower profit customers with lower profit devices. The long game again.

      • Sprewell

        Sure, but the only manufacturer with any oxygen right now is Samsung, ie Android already kneecapped everyone for Apple. It’s possible that that was the strategy that evolved at Apple: keep gobbling up all the insane profits from the high-end while Android killed everyone else on the low- and mid-end, then swoop in and kill Android. We’re now about to see the swoop with the release of the 5C, which is likely why Apple is doing a special launch event for China for the first time with this release.

        I don’t know if that “critically wounds” Samsung though, as Samsung competes successfully on the high-end. The S4 costs $630 without subsidy, I’m sure the S2-3 did also. The Note is not a low-end device. Even people on the high-end want a choice, and Samsung provides one. Samsung is a mixed bag and very tough to call.

        But yes, Apple looks poised to take a margin hit and try to capture the burgeoning midmarket, which is the prized territory that everyone else is now aiming for, as all the Android OEMs have made a special point of releasing midmarket “mini” phones like the HTC One Mini or S4 Mini or the Moto X because they see a lot of growth there. If the 5C gets significant share in the midmarket, that could be the deathblow for reeling OEMs like HTC, while further cutting into Android share, as is already happening in the US.

      • asp

        What is the lifetime ASP for an S4, S3, S2, Note, etc? Not much visibility into that company.

      • Sprewell

        Here are the average prices- they vary by color- for those models that I see on Newegg right now:

        S2 – $295
        S3 – $430

        S4 – $620

        Note – $400
        Note 2 – $542

        They sell the iPhone 4 for $405. This seems to indicate that Samsung models generally sell for $100 less than the equivalent Apple models across the board, as the products get older. Of course, Apple does not sell phablets like the Note. :)

      • obarthelemy

        Actually, in my country (France, which is rapdily moving from mainly subsidized to mainly unsubsidized), the one salient fact is that there is almost no midmarket. Most smartphones sold are either above $500, or below $200.

        That might be because mid-range phones are meh. That’s probably not all of it though: entry-level phones are good enough, and high-end phones are best in class. What room does that leave to the midrange ?

        Apple will probably manage to rise prices on the entry-level. I think we’ll mostly see a price or sales collapse at the high end though, for all OEMs.

      • Sprewell

        I’ll just combine my response to all your comments here, rather than answer separately in five different comments, like you just did. :)

        I don’t believe MS has said or anyone has revealed what they make per WP or Android handset, but I doubt they’re making more per Android handset. They make more from Android overall because there are a lot more Android devices, so they make it up on volume, but I doubt it’s more per handset. Also, MS came in to collect their mafia money after all these OEMs were shipping a ton of Android devices, so the fact remains the OEMs chose and built up Android when it was free.

        We know the Android platform is flawed, as reviews still regularly complain about UI lag and bad app performance and selection. It got to 80% share regardless because most of their customers don’t care about apps, which is why the Android app store lags far behind the Apple app store. Java/JIT does not have “a small impact on performance,” it’s noticeable. It may allow for “a variety of CPUs,” too bad almost nobody uses anything other than ARMv7. :) The openness of Android is important, not so much the other stuff you list.

        I wouldn’t call Samsung’s hardware great either. Exynos is not best of class, the PenTile displays are problematic, and those flimsy back covers probably come off pretty easily if you drop them. On the other hand, their cameras are better than most, people really seem to want replaceable batteries, and they get good battery life. Overall, good but pretty mixed bag, if you ask me. And yes, features obviously count for them, which is why they throw all kinds of crazy software features into their phones, which I bet almost none of their users ever finds let alone uses, but they buy Galaxy because of the marketing hype about all the features it has.

        “That FOSS argument never worked on the desktop. Why should it work for mobile ?”

        Read my later comment, I wasn’t making a “FOSS argument.” I was saying that an open source core, surrounded by proprietary components, is important and we already know that works, because Android has used it to great success. :)

        “My take on it is that devs left to themselves do stuff to show off to their fellow devs, not to help users. It’s not even featuritis, it’s innovationitis.”

        This is completely wrong, as there isn’t much innovation in FOSS either. The volunteers who contribute to FOSS simply build something rudimentary that apes existing software and works for them, everything else worthwhile is done by commercial entities.

        “On Servers, Linux works because of the strong hand of Red Hat and its ilk.”

        Also because on the server you don’t have to give away the code. Google runs a modified linux kernel on thousands of servers and doesn’t release their modifications because they aren’t selling the software, as the license doesn’t make them if they aren’t selling it.

        “On Mobile, Linux works because of Google.”

        Sure, but Android only works because everything above linux uses the more permissive Apache license, which allows the OEMs to customize the Android stack and not release their modifications.

        You getting the theme here? :) FOSS doesn’t work, but an open source core with proprietary modifications works very well, perhaps the best.

        “When has that “extremely collaborative” model worked w/o strong corporate guidance ?”

        It hasn’t. :) I’m extrapolating, based on the fact that specialization happened in every other tech market in the past, to what it might look like for software.

        Also, I guess it depends what you mean by “strong corporate guidance.” I envision a future where thousands of small shops collaborate on large software projects. Each small shop will likely be incorporated, so that is “strong corporate guidance” of a different sort, from many small commercial entities. If you only mean guidance from large corporations, then the small shops I’m talking about won’t need that. It hasn’t happened yet because we’re still experimenting with these models. I’m using the evidence so far, and adding in some business theory, to predict what the endgame for software will be.

        Regarding branding, I guess it depends on what non-techies you talk to. The people I talk to are so clueless about tech that they have no idea what is a good brand. They’re aware that Apple and Samsung have products available, because of their marketing blitzes, and sometimes know that they’re successful companies, but that’s about it. They’re always asking me who’s good, because tech moves so fast nowadays that they have no idea who’s good. This isn’t the old days where you just bought a Sony, even though it cost more, and knew it would be a good product. ;)

        Again, this was a prediction about the information age, based on leading-edge evidence. I regularly read reviews on Newegg, Engadget, The Verge, Notebookcheck, and figure out what’s good. I predict that we will come up with all kinds of ways to better present that information to buyers, so that they can combine and extract the info they need from that user data and reviews to make informed buying decisions easily. It’s coming together now, but we still have work to do to make it usable for the general public. When that happens, and it will fairly soon, branding dies. :)

        “Actually, in my country (France, which is rapdily moving from mainly subsidized to mainly unsubsidized), the one salient fact is that there is almost no midmarket. Most smartphones sold are either above $500, or below $200.”

        Ben Evans just explained this in a recent post about what the iPhone 5C price might be. Basically, in subsidized markets, there’s no reason to sell a phone for less than $450, as $450 is the threshold at which phones are given away for free with a contract. The sub-$200 phones are probably Chinese phones that are being sold internationally: those do well in China because they’re unsubsidized and its a developing country. So there’s a big price gap between the two classes of smartphones.

        “That might be because mid-range phones are meh. That’s probably not all of it though: entry-level phones are good enough, and high-end phones are best in class. What room does that leave to the midrange ?”

        They’re only meh to the early adopters. Smartphones have 50% adoption in an advanced market like the US. Current feature phone users is where growth is going to come from, as they’re the late adopters who are looking to finally jump on the smartphone bandwagon. There’s no way they’re paying $650, or $200 with a contract, to buy a high-end phone. They will be heavily attracted to the sub-$200 smartphones you mentioned, so the hope of the OEMs is that they can tempt the late adopters into the more profitable mid-range, by offering more and better mid-range choices. There’s an entirely new class of customers entering the smartphone market, that’s who the mid-range smartphones are aimed at.

        Also, the high-end spec wars have kind of gone crazy. People are burnt out on the high end, which is why flagships like the S4 and HTC One have underperformed. Many of those people might stick with the mid-range this time around, which after all is often more powerful than last year’s high-end phone (this market moves fast!), as the hardware is now good enough.

        “Apple will probably manage to rise prices on the entry-level. I think we’ll mostly see a price or sales collapse at the high end though, for all OEMs.”

        I don’t think Apple wants anything to do with the unprofitable entry-level, they want the potential volumes from the mid-range. If the mid-range becomes as successful as everyone thinks it will, the high end will suffer and it has already come down so far this year.

      • obarthelemy

        Indeed, MS seem to be making around $6 per licensed Android (http://www.neowin.net/news/microsoft-will-make-34-billion-from-android-in-2013), versus “less than $10″ for WP handsets.
        Your “performance” part is completely off. Tactile lag for example, from the only site I know that reviews it: http://www.lesnumeriques.com/telephone-portable/reactivite-tactile-ecran-21-smartphones-tablettes-n29229.html. The ARMv7 thing is pure bunk.
        Ditto your Samsung blurb: Samsung mostly use SnapDragon, no longer use Pentile, etc, etc…
        You misunderstood me about the midrange. I’m saying there’s almost no extra features to justify a price doubling compared to the entry level. Whether new market, mature market… People either want “good enough” or “best of class”. “a bit better for a lot more” is a very hard sell.
        For all intents and purpose, the 5C from what I’ve read is entry-level. We’ll see once the reviews come out.

      • Sprewell

        I suggest you actually look at your tactile lag link. It shows the top three least laggy devices are all Apple and that Android devices have on average double the lag of those Apple front-runners. Another big issue is that Android apps will sometimes all of a sudden flake out and freeze up for a couple seconds, for no apparent reason. I suspect this is a garbage collection cycle, a common problem with a virtual machine like Java, but I’ve never dug into it to make sure.

        You disagree that “almost nobody uses anything other than ARMv7?” Wow, where are all these other architectures that people are using? Funny how you can’t name one that has any share. Samsung only switched to Snapdragon this year, but I wonder why that is? ;) Perhaps because I’m right and Exynos isn’t that great? Nah, couldn’t be. ;) The Note, S3, and S4 all use PenTile, not sure where you’re getting your information.

        As for the midrange, the way OEMs are going about it is to shrink and take out some features from the flagships, ie the HTC One Mini, Moto X, and S4 Mini. There is a distinct value proposition there: many of the features of a flagship for a price right in between entry-level and high-end.

        “The 5C from what I’ve read is entry-level,” ie you believe the 5C will be priced at sub-$200? Or you believe it will have the same feature set as an entry-level sub-$200 phone? Because I don’t see the 5C being in either of those categories, it will be mid-range. The debate I’ve seen is whether they’ll price their mid-range-featured 5C at a mid-range price, to go for volume, or at the bottom of high-end pricing, ie $450, to keep margins up, as Ben talks about in my above link. Nobody thinks it will be entry-level.

      • Walt French

        The “Microsoft approach” is missing the evidence that it can work in 2013. Who buys OSs? OEMs. Why will an OEM pay Microsoft $15 for a license when it can pay Microsoft $10 to use Microsoft’s IP? Why, if they can get a customer to pay the extra $20 to cover the markup they don’t get. Why will a customer pay an extra $20?

        The answer from Redmond has been “Well, Windows sorta-compatibility! Office Documents! Corporate manageability!” And those are none of them reasons that a consumer would want on a personal device. Then you look at apps, and it gets worse. Then you wonder whether the next WP will get the same lack of upgradability that WP7 got (known when WP7 Lumias launched). And the fact that Microsoft has never offered coupons to ameliorate Microsoft killing PlaysForSure for the Zune. And… well, the consumer never gets around to understanding while Colorful Block Tiles is such a great UI.

        So neither HTC nor Samsung got any positive feedback/sales on their timid WP8 devices and they’ve cut their losses. Somebody please let me know when any OEM offers a WinPhone because it’ll be a shocker. The only possible fit is if BlackBerry were to enter into a deal to offer WP devices, the way that Palm once offered both its own, and WM machines. But that would be too tiny a niche for Microsoft, and at this stage probably too much technical challenge for BB.

        You’re right about the execution being hideous. What you don’t see is all the missing steps between some vague “vision” of Microsoft everywhere/everything, and a consumer of those products.

      • Sprewell

        I agree with all your criticism of WP, but that wasn’t my point. I was simply saying that OS licensing is likely to be the long-term winning approach, not the Apple integrated model or the free and open source Android model. Microsoft has completely botched the OS licensing approach though, because of their lackluster technical and business execution, I stipulated that already.

        In fact, there are large disruptive changes coming that make it likely that none of these companies will hold this market for long. Android was disruptive because Google both gave it away for free and opened up the source, but they don’t really develop the source in the open. They develop it behind closed doors and dump an open source release every once in a while. I don’t know how much access they give certain OEMs, especially Samsung, to that closed-door development process, but the indications I’ve seen are that even the big OEMs get little to no access to the development process, likely for silly reasons of secrecy.

        Google is missing a big opportunity here however, as the collaborative development model of open source is the future. Not the free price or necessarily even having access to all the source- most Android phones are only partially open source, once in you factor in all the closed-source modifications that OEMs add in- but the extreme collaboration across organizations that is enabled by having an open source core. That is what drives more collaborative open source projects like Chrome, which has both Apple and Google making significant commits to its WebKit renderer, mostly out in the open for everyone to see and take.

        My point is that we will see an extremely collaborative model rise up, where dozens of small software companies collaborate together to put out a smartphone OS, with each specializing in various domains, like the scheduler or the bluetooth stack. This is the natural evolution of all technology markets, where Ford was vertically integrated for some time, but eventually became primarily an assembler of outsourced parts. Apple actually tried to enable this to some extent more than a decade ago, when they open sourced Darwin, the OS base of OSX and iOS, but gave up on it when nobody trusted them enough to work with them. However, they still release the source for Darwin, at least the one that underlies OS X, not iOS, though the differences are likely not radical.

        This specialization model hasn’t really come to operating systems yet, with the possible exception of Google using the linux kernel for Android, since many companies contribute to the linux kernel. But everything above the kernel in Android is developed exclusively by Google, before being customized by the Android OEMs to a largely superficial extent. When this natural evolution of the operating systems market towards specialization happens, it is likely that single-source providers like Apple and Microsoft will be disrupted. When this will happen I can’t say, but it is the way every tech market before has evolved, and collaborating on software is even easier than for other physical tech, so I’m sure it will happen someday. :)

      • Walt French

        There are two reasons I think it extremely unlikely that we’ll see a broadly-dispersed, collaborative open-source OS sold for any cost any time soon.

        First, who would charge for freely-donated software? The closest PC analogy we have is Red Hat, which gives away a functioning linux but charges consulting fees to integrate customers’ activities with their hardware — the wetware analog of the software OS. But OEMs seemingly have little or no trouble integrating Android onto their machines. If an OEM is going outside for software, he is NOT going to want to mediate disputes between different developers of parts of the OS—that’s bad enough today under the app/OS split.

        Second, the OS is today the closest the user has to a definition of the “soul” of a given mobile, and as long as there is any branding in this space (forever, if other complex products are any guide), the manufacturers will want to own the identity that goes with the OS.

        And now, a wildcard: while Google has destroyed the OS business model on smartphones, Microsoft is still working to recover. Microsoft has pledged never to sue an open-source project that didn’t charge, and indeed has only gone after Android OEMs, not Google. But either an agreement with Motorola or the (legalistic/hairsplitting) angle that Google’s requirement of loading Google apps with Android is tying that makes Android NOT free to OEMs, could serve as a justification for busting/footnoting that commitment. That could either be the Battle to End All Battles in smartphoneland, or there could be a negotiated settlement that puts Microsoft back into the game.

      • Sprewell

        Let me start off by saying that I didn’t predict “a broadly-dispersed, collaborative open-source OS,” I said “an open source core” that many dispersed companies would collaborate on. That means that some key components will be open source, while others will be proprietary, just as you see with the software I mentioned: Android, OS X, and Chrome. But I’ll address your reasons anyway, as they aren’t necessarily dependent on that distinction.

        “First, who would charge for freely-donated software?”

        Heh heh heh, I’m enjoying answering this one.

        Apple.

        They took the open source Mach kernel and BSD userland to create Darwin. They took compilers like gcc and clang, web renderers like KHTML, which they turned into Webkit, various programming languages like python or ruby, and bundled it all together with their proprietary GUI and APIs. They then charged for the entire bundle, a lot of money, because the open source licenses of those projects allowed it. Admittedly, the open source components were probably a minority of their codebase, but they had no compunction about bundling it all together and charging for it, nor should they have, as the licenses allowed it and they kept the source open where they could.

        The Red Hat consulting model has nothing to do with what I’m talking about. I’m talking about a product model, like Apple or Microsoft, hence my emphasis on OS licensing.

        As for dealing with developer disputes, it’s possible that someone like Red Hat becomes an intermediary to deal with that. Red Hat would license code from a large collection of highly specialized, outside developers and make sure they all work together, fulfilling the current Google role with Android and the outsourced linux kernel, then license it to the OEMs. You might have a Red Hat that deals with a certain collection of OS devs to produce an OS for smartphones, an Ubuntu that deals with a different collection of OS devs to produce an OS for enterprise, and so on. Or the OEMs may just deal with the OS devs themselves, just as Walmart deals with a thousand different suppliers today. I don’t see this as much of a problem, and if becomes one, there are well-known solutions.

        As for “branding,” first off, I don’t see brand mattering going forward. I routinely consider buying hardware on Newegg where I’ve never heard of the brands, because I have access to actual user data about how good their products are. Brands will be another casualty of the information age.

        But leaving aside that tangential point, if brand is so important, why is Android so successful? No OEM controls Android, yet almost all of them use it. As long as the OEM can customize the OS they’ve licensed, and they would still be able to under my model, that is all the differentiation they need.

        I think your arguments have already been proven wrong by the success of Android and OS X, which both use open source to outsource many components.

        As for your mooted Microsoft/Google patent war, that’s small ball and won’t matter. We’ve seen patent wars going on for years now, they never change anything or result in outcomes that matter. A patent lawsuit loss in the millions is a pittance for Apple or Google or Microsoft and has basically no effect on their future. The only time patents really affect the players is when they are disallowed from using obvious but patented features, like one-click buying, or their products are banned, which never lasts. As odious as the patent system is, it is primarily a financial leech on the system, redistributing money to lawyers and others who don’t deserve it, but it really doesn’t affect the competitive outcomes much.

      • obarthelemy

        “Brands will be another casualty of the information age.”

        Actually, the reverse is happening. People confronted with stuff they don’t understand use brands a s a proxy. For whatever: quality, value, ease… as a proxy in general. Just ask around yourself what people think of brands. You’ll never get a “don’t know, don’t care”.

      • Walt French

        @Sprewell wrote, “Admittedly, the open source components were probably a minority of their codebase…”

        That doesn’t exactly make a strong case for your argument. I don’t see what you think is going to come of this line of reasoning.

      • Sprewell

        Well, you only asked if anyone would charge for open source code and I pointed out that Apple was doing so, albeit for a bundle with their own closed code. What came of that “line of reasoning” was a fact that answered your question.

        On the one hand, we have Apple that charges a lot of money for a codebase that is open source in its core, which is not very large, but mostly closed on top. On the other, we have Google that charges no money for an OS that is completely open source throughout, but charges a small amount for the Google apps on top, while OEMs that make closed modifications of the source they get from Google sell it with hardware for a range of prices, from a little to a lot. Both use an open source core, both do very well, albeit in different ways, ie profit vs unit share, though Android is much more open and the model obviously helps Android more than it does iOS.

        I’m suggesting that something closer to the Android model but more closed, albeit without hardware, ie straight software licensing, and with a mix of something like 50-80% open, ie in between Apple and Google’s extremes of openness but closer to Android, will be the winning model.

      • obarthelemy

        That FOSS argument never worked on the desktop. Why should it work for mobile ?

        My take on it is that devs left to themselves do stuff to show off to their fellow devs, not to help users. It’s not even featuritis, it’s innovationitis.

        On Servers, Linux works because of the strong hand of Red Hat and its ilk.
        On Mobile, Linux works because of Google.
        When has that “extremely collaborative” model worked w/o strong corporate guidance ?

      • obarthelemy

        maybe because it’ snot about how *great-looking* the hardware is, but about *great* it is ? Not everything is bout looks, internals and features count. Though for not everyone, it seems.

      • Walt French

        And regards the collapse: methinks you don’t have to wait.

        This AM, Horace is tweeting where the Android share is, and the news is shocking. In the US, two high-end companies compete for the lion’s share of sales, but elsewhere there is a segmentation and almost all medium- or low-priced phones are no-namers disrupting the incumbent brands (e.g., Samsung just knocked off #1 in India).

        The real interesting pivot/re-invention will come from Samsung—how will they differentiate against BrandX phones that cost half as much? Samsung has used its advantages in production, distribution and focus well, but at the same time they’re trying to bridge the moat at Apple (the other Androids having essentially been fatally wounded), a thousand firms are attacking Samsung’s core business, and from all sides.

      • obarthelemy

        With MS getting royalties on most Android devices, Android *does* have a cost to OEMs, reportedly higher than WP: $15 vs $10. Those prices are factored into the handsets. Yet OEMs chose Android, and customers chose Android.

        Google had the same issue with Apple: no certainty that they’d still be able to “ad&track”. Displacing Apple was as important as displacing MS.

        As for the “flawed platform”, if it were we would know by now, and it never would have gotten to 80% wwide market share.Using Java and JIT has a small impact on performance. It also allows for a variety of CPUs, which is coming into play now that Intel are waking up, on top of the competitive ARM market and anecdotal MIPS foray. There are also other OS features (the intent system, the UI especially widgets and notifications, the openness, the hardware-independence) that are extremely valuable and forward-thinking. Every OS is flawed. You just have to avoid the most egregious ones.

  • newtonrj

    Horace, Are you glad to have moved on from analyzing Microsoft from within Nokia? Probably a position they no longer need! -RJ

    • http://www.asymco.com Horace Dediu

      I moved on in 2005 or so. By then I realized that Windows Mobile would not be a threat. I went on to study BlackBerry and then Apple. I started looking at Apple on my own as it was not something Nokia was willing to put resources into studying. For that I am thankful.

      • Chris Carnel

        “I started looking at Apple…..was not something Nokia was willing to put resources into studying.” Perhaps the most remarkable sentence I’ve read on Asymco.com. And that’s saying something!

      • orienteer

        I guess that by the end of Horace’s tenure, the iPod was well along but Nokia couldn’t see this as a progenitor to a phone (2007)? Too much of a stretch!

  • http://www.sepharim.com/ Bob Egan

    Very thoughtful and intriguing post Horace. What I’m struggling with, is the fit, of assigning value to the entire RPP model in the nokia/microsoft purchase. The complication (of course) is that Microsoft re-aligned itself (terribly in MO) to a functional model, instead of a product division model. As I work through the RPP components, I’m asking myself how does a functional model in a company with such a wide breath of competing interests (and internal stack scoring) really come to grips on how to value those components. Thoughts?

    • handleym

      I’d put it slightly differently. What are Nokia’s P?
      Maybe this is unfair but when I think Nokia, I think “premium brand — for the developing world”.

      This is a perfectly reasonable business model. It is a way of generating money while making the world a better place. BUT it is not a sexy business model, and it doesn’t naturally fit into MS’ current business model and view of itself. For the two example you give (NeXT and Pixar) there was a fairly obvious way in which the acquired company represented something of the aspirations of the acquirer, but I don’t see that here.

      The only answer I see is the ability to make HW. And that, it seems to me, is basically worthless UNLESS MS is willing to go all in and give up WP8 as a licensed product. If they stick with the licensing dream, it will constantly slow them down, and they’ll have to pay an abstraction penalty to match every new feature in the OS to some hypothetical model of the range of targeted HW across different companies.

      BUT suppose they do go all in? Now we have the WP8 team having to interact closely day-to-day with a team of very different history and culture, and in an environment that has lived with a civil war mentality for ten years or so. Can you imagine the cage match that will result from this, the level of HATRED and behind the scenes backstabbing?

      Something I think would be very valuable, in this context, would be an accurate, long-form account of how the Win RT and Surface RT teams worked together before they shipped — and how they handled their massive crushing failure after they shipped. The WP8/Nokia mashup is even harder than that, but at least how that was handled would give us some insight into the MS DNA on these sorts of collaborations.

      • handleym

        Thinking some more, there is another way to think about this. What if MS WERE willing to embrace Nokia’s developing nation heritage rather than fleeing it?

        So instead of crippling your phone when it comes to things like payments or VoIP because of the demands of the US carriers, just accept “screw them”, and concentrate on doing the best job you can for your developing market customers?
        Put Skype on every phone, carefully tied into the main “phone app”, and intelligent enough to make the best choice of Skype or telco voice depending on the number being called, how many minutes you have left in your basket of free minutes, the time of day, etc.
        Go for no compromises payments and money transfer. Get all this stuff beta tested and perfected (and in markets that in some ways are more demanding, eg what you do has to work even if the network is down, with appropriate persistence and retries). If you create something compelling enough, you’re in a strong position eventually to take on the US — at first by bribing the weakest carrier (T-Mo? Sprint? maybe even one of the local carriers) to accept you and get people to see what you have, and then trying to get people pressure (or even the FCC or Congress) to force the rest of the carriers to go along.

        Also consider alternative types of customers and business models. A common feature of developing countries is people waiting and walking — waiting and walking everywhere. Sell the phone with a kick-ass spoken-word app built-in and a cheap subscription spoken-word audio plan allowing you to constantly download new podcasts and audiobooks. Pair up with some local out-of-work actors and kick-start audiobooks in the local language. Likewise for shipping eBooks in the local language on the phone, again perhaps via an all-you-can-eat subscription plan, and built-in something like Instapaper or Safari reading list which allows you to capture material while online for later reading offline.
        (This doesn’t prepare you for storming the West in a few years, but it does make money while you’re in the wilderness.)

        My guess is that Nokia would be very amenable to this sort of thing, and capable of organizing it. The problem is, of course, MS. Do they have the patience to sit it out for five years, all the while suffering from Apple envy?

      • obarthelemy

        MS Want volume, they don’t care were it comes from. Prepare for some serious dumping.

        I’m concerned about Nokia’s niche Camera phones. I don’t see MS doing niche.

      • obarthelemy

        Not so much “developing nations”. Smartphones’ market expansion is mostly downmarket, subsidies are mostly being phased out, low-end hardware is “good enough”… The low-end market, even in 1st-world countries, is growing the fastest. Plus that’s were most unit sales (if not profits) are, and right now MS need unit sales more than profit.

        MS’s OS is good with low-end hardware, Nokia is good at low-end hardware…

      • http://www.noisetech-software.com/Home.html Steven Noyes

        Subsidies have been about to go away for 15 years. They are going no where and even tmobile’s attempt has mostly turned back into a subsidy market.

      • obarthelemy

        the US != the world… and, where’s smartphone growth nowadays ?

      • developing

        Developing nations, perhaps, as you previously disagreed with.

  • Walt French

    Looks to me that Microsoft is not just underscoring its commitment to being a “devices and services” company, but that it’s also signaling a recommitment to the original “Windows everywhere” notion, with consumer products tightly linked to the Enterprise solutions.

    Which in turn reinforces the potential benefit from a functional organization with a strong CEO. (I say “potential” because I couldn’t imagine the central mission/authority/clarity BEFORE the acquisition that adds in a major short-term challenge.)

    And of course, that makes me wonder: how did the Board approve a major acquisition and a re-org at the same time it waved good-bye to the CEO who certainly architected it, leaving his successor as an open question/unknown? I agree wholeheartedly with Horace’s deprecation of the Great Man Theory of Leadership, but this is insane.

    The best answer I can craft to that question: the re-commitment to the Gates vision and the re-org and Nokia deals were foisted on Ballmer by the Board, who decided his reputation and personal wealth could not survive Armageddon. Still, it seems remote… who has any idea what’s going on?

    • obarthelemy

      Isn’t the CEO’s departure the best time to do a reorg ? The new CEO will get to start with a clean slate ?

      I’m not sure the question of the new CEO is *that* open. It looks like the Nokia buy, the reorg and the new CEO were coordinated moves. I’m not 100% sure it will be Elop, but I’m sure he knows at what place he’ll end up, as soon as the merger is successfully completed.

      • 4min33

        Can’t wait for the Burning Platform memo concerning Win8.

      • Walt French

        To your first para: no, and no. Or at least, “not necessarily” and no. The best time to do a reorg is when you have a clearly-identified, strategic reason for undergoing the huge disruption and loss of talent, and the urgency to do it sooner rather than later. Also: the buy-in of the people who will be doing all the hard work, and plans to replace the 10% or so who will resist, passive-aggressively or more adamantly. Plus, at least a big-picture vision of the resources necessary to change all the incentives, attitudes, … oh gosh, it just goes on.

        Otherwise, it looks like the Burning Platform Redux, a diagnosis of a problem but despite a clear vision statement of one successor platform, individual groups working on all sorts of peripheral products, some of which, e.g., the Pureview 808 that engineers insisted “couldn’t” work under WP, stole thunder from the Windows theme.

        You might argue that Nokia’s disparate engineering groups had a lot of autonomy, that they were used to going their own way without marching to top management’s plans. But Microsoft is even MORE famous for active hostility between groups. If Elop couldn’t whip the Nokians in line, how will he have more active participation in Redmond?

        As to the “clean slate” part of the question, go back above and tell me what part of that plan is actually negotiable by the new CEO. Any significant re-direction would rightly be seen as showing that the plan du jour is not a strategic plan at all.

        Now, regards the rumors that Elop will head Microsoft: that could certainly make sense* and would answer your questions. It requires that Elop have played an incredibly strong hand exceptionally well, by insisting that the purchase was made conditional on Ballmer’s departure, and that Elop, awful results at Nokia to the contrary, has been anointed for the job.

        * in the “it’s just crazy enough that it might work!!!” kind of sense.

      • obarthelemy

        clearly identified reason: check (failure in Consumer in general and mobile in particular, which are both increasingly important)
        urgency: check, 2 yrs on phones and tablets will be accounted for.
        buy-in: no less than any other time, maybe more if layoffs and sense of “now or never” are de saison
        layoffs: as good a time as any
        big picture: check

        Let’s not pretend the board, and Gates in particular, are letting MS flail like a headless chicken, and that’s assuming the next CEO isn’t already there. MS’s board might have been too hands-off, but it’s nowhere near as bad as HP’s (yet again, who is ?). If Elop did one thing at Nokia, it is whipping in line. Probably the wrong line though ^^

        The vision is clear, and has pretty much always been clear. It’s the execution that kept failing. Indeed, the next CEO will be there to implement the board’s plan. Isn’t that what CEO means ? I think an outsider would be better to clean up the entrenched fiefdoms, actually, but maybe Elop can make it.

      • Walt French

        I can only quibble that a vision that produces awful execution doesn’t deserve the word “vision”—maybe “fantasy” would be appropriate. More than one commenter (and not Tomi A, either) characterized Elop as running Nokia the way you’d run a spreadsheet, with no feel for the pulse of the company. Surely, that’s a signal of how poorly he was able to work through his direct reports to communicate with, and actually lead, the troops. Why should the Microsoft Board not be very afraid of that when they’re supposedly starting a game of 52-card pickup?

      • N8nnc

        The blind leading the blind have no fear?

  • peter

    Changing CEOs, major acquisitions, reorganisations and the need to catch up with competitors are subject to significant execution risk and uncertainty.

    Let’s face it Microsoft are not some scrappy underdog baseball team that just needs to get its act together. They are a massive organisation with a 100,000 employees and 30,000 more from Nokia to join soon. Work on any product that they launch this year should have started 2 years ago. The inertia in such a large organisation with such a hazy vision is incredible. Also, don’t forget that hardware and consumer businesses are not exactly areas of strength for Microsoft to begin with.

    It would be impressive if they could pull it off, but the odds are against them.

    • obarthelemy

      Actually, I think the pieces of the puzzle are now in place: they got the OS, they got the UI, they got the appstore and other cloudy miscellani… It’s really about execution now.

      • Kizedek

        Traditional OS + UI ≠ Mobile OS

      • obarthelemy

        Thank you. You do know Windows Phone internals are more different from desktop Windows than iOS is from MacOS ?

      • Kizedek

        Yeah, and that’s the point — they took the wrong parts. Windows Phone is more like Nokia’s OS and every other attempt at a mobile OS than it is like iOS which took the right parts from OS X and made the rest from scratch.

      • obarthelemy

        Any proof to back up your wild claims ?

      • Kizedek

        Well, the nature and depth of the apps could give a clue for a start.

        Also, Nokia is as good at hardware as Samsung, but it’s smartphone’s aren’t selling. Perhaps it’s the OS.

        You keep saying that MS has the Enterprise. In Mobile? How so?

        It looks like iOS is enabling all sorts of companies and industries to push the boundaries make Mobile accomplish new things for them, including networking.

        Why is company after company, and industry after industry, and institution after institution, and even govt departments and military units opting to equip its workforces with iPhones? Where are the sales of Nokia smartphones?

        Where is a good implementation of even one Windows Phone app, say Office, on mobile? After 6 years! The current complex apps have functions that quickly devolve into a compromised, confusing and unusable UI that requires styli, etc. And their APIs and developer programs are a shambles.

        Apple is pushing into the Enterprise both because users and developers love the products and the OS and platform have obvious strengths that have to be taken into account in an Enterprise setting. The strengths can’t be ignored any longer. But you always assume that Apple never had any software chops and that this phenomenon is all about being cool.

      • obarthelemy

        We were talking about OS internals, but having no meat to your argument you switch to other topics.

        Anything to backup you claim that “they took the wrong parts” ?

      • Kizedek

        It’s hard to understand how it’s another topic when I am suggesting that developers, users and the companies that employ them are doing things with the iPhone that can’t be done (certainly haven’t been and aren’t being) with Windows Phone. After a number of years.

        Other commenters have gotten into the ins and outs of specific OS features, approaches, code and APIs with you. Sorry to disappoint you, but I won’t be.

        So, no, not a lot of backup, other than wondering why (if we are to assume there is real substance and all the right parts are there) customers, developers and companies are having such a hard time seeing Windows Phone as a viable alternative to iPhone — let alone as the preferred option showing some evidence that MS with its supposed hold on Enterprise and its “Windows Everywhere” still “has it” and is a force to be reckoned with.

      • obarthelemy

        No, no one else ever has tried to hold the ridiculous views that Windows Phone is a technically flawed OS and just can’t do some things. Time to back that up or shut up.

        You’re confusing the fact that apps aren’t there because there’s no market, with the fact that apps *couldn’t be done* if devs wanted to. And disregarding the evidence that WP does OK on very limited hardware. And that a few of the few apps that *are* there are quite good.

      • macyourday

        People keep responding to the child that says (not asks) why. While it is useful to have a discussion, or even argument, when the child doesn’t understand or simply disagrees, why bother?

      • Space Gorilla

        It seems that as computing devices become more vertically integrated and become consumer-facing appliances, and as the computer itself is abstracted (and grows more powerful at the same time), the result is that IT shrinks. As this happens any platform that isn’t integrated, abstracted, *and* curated, is at a disadvantage.

      • Ace

        what app store? They built one, sure. But there’s nothing of value in it for consumers.

    • peter

      I would add that Nokia’s problem was that there were no significant network effects pushing the Windows phone, unlike Android and iOS.

      Microsoft — by buying Nokia — may be able to prevent the imminent demise of the only manufacturer that is committed to the Windows phone, but the deal does not create the network effects that they need to succeed. If anything other manufacturers might abandon or ignore the platform because they fear that Microsoft would not give them a fair shake.

      The deal also has to potential to shake up competitors in unexpected ways; Apple might make the 5C $50 cheaper to lock out Microsoft (we can dream), Samsung might decide to reinforce its Tizen strategy (copying the Microsoft playbook), etc.

  • poke

    I think an interesting way to look at this is to ask why Microsoft didn’t move into PC hardware. After its partners started outsourcing manufacturing, why didn’t Microsoft just buy from the same Taiwanese ODMs as Dell and HP and slap a Microsoft sticker on the boxes? Why not do the hardware too? (I think the idea was floated at one point.) Because IT is about customer relationships. Microsoft would have had to rebuild all those relationships with enterprise customers. So why is Microsoft moving into mobile hardware now? Because it has now been made very clear that its usual partners aren’t going to play in this space. HP, Dell, etc, are out of the game. Microsoft has always been in the hardware business when it suits them; they just haven’t been that good at it (various TV initiatives, Zune, etc).

    • colindoc84

      Counterpoint: Xbox.

      • Ace

        Xbox has ‘made’ limited money in its history. It’s been run as a loss leader for too long. It has ‘mind share’ and market share, but isn’t profitable enough – especially when you consider its huge marketing costs etc.

    • mjw149

      They are doing this with Surface, they just aren’t very far along yet. Same with cloud-computing, you know? Azure cloud compute time replaces Dell servers, you get that? MS already has those relationships, and it doesn’t want to lose them to Amazon, so it has to cannibalize its own business – and partners.

    • Accent_Sweden

      I suggest that Microsoft has never taken consumers seriously in the PC business. MS has always been painfully aware that their customers are HP, Dell, etc., not the consumer. So every time the company played with the idea of making MS hardware, its inner accountant pointed out how doing so would piss off its partners. MS has had aspirations to be a consumer company in the computer business, but the reality of who buttered its bread always stopped it in its tracks. This isn’t unlike the problems mobile phone makers (including Nokia in the US market) faced with telecoms dictating what features could be offered on phones.

      • Travis

        This is what Clayton C. refers to as marginal thinking, which in the end leads to paying the full price. Just like Blockbuster did by ignoring Netflix.

  • mjw149

    Brilliant point. The new MS resembles Nokia (Ovi, Here, etc.) more than the old Microsoft.

    I’m a bit skeptical that Nokia’s talent will remain intact in the transition. The temptation to make further cuts during an acquisition is enormous AND MS is already widely considered as too large. Adding Nokia’s smartphone division is quite a big addition.

    • N8nnc

      An opportunity to make 2 + 2 = 3 (or even 1.5). While regrettable for the individuals impacted, a kick in the pants may be what’s needed to revive the patient. And the redundant may spark their own fires of innovation.

      Now to those who talk of a coalescing to integrated players – Apple, Google/Motorola, and Microsoft/Nokia (& pro forma, Backberry) – I have to ask “Whither Samsung?”. They own the lion’s share of profit from Android, but don’t own Android (Tizen they own, but it seems a difficult road to compete with their own Android products). Google owns Android, but get little tangible benefit from that ownership. Meanwhile Apple dominates the profits.

  • Edwin Zuidema

    I think the only Priority that is being acquired is that of Nokia. If Nokia would stop manufacturing Windows phones, Microsoft’s Windows Phone share plunges. They acquired Nokia to make sure the slow but stable Windows Phone growth continues, which was not guaranteed.

    • obarthelemy

      i think the Priorities being purchased are
      1- consumers. MS can’t shake their focus on Entreprise. even when at last coming up with an OK mobile interface, they still have to go back to Entreprise (well, desktop) and sync it with Consumer (mobile).
      2- mobile.not so much the manufacturing, but the designing and the carriers relations are very different than those of desktops.

  • bertdanner

    Terriffic distillation of how to understand the potential rationale of an action that on the surface looks completely devoid of sane strategy, and more like a knee-jerk response done in abject desperation, ala Googorola. Thanks, Bert

    • Kenton Douglas

      ” knee-jerk response done in abject desperation, ala Googorola” How so??

      • Walt French

        There’s a theory going around, that Google knew / should have known that Motorola’s patents were actually of trivial value.

        The head of the EU Competition Commission made remarks today reminding us of that very fact: a case against Google, for improperly attempting to enforce its inflated “rights” under those patents, is in the works, possibly due out against them soon.

        Maybe Google’s lawyers had a theory under which their patents would be killer against Microsoft and Apple. But unfortunately, since then, the ITC, a couple of US courts, the FTC, the EU Competition Commission and maybe a couple of other authorities have demolished the theories.

        Personally, I wouldn’t call Google’s actions “knee-jerk, abjectly desperate.” I think they were calculating, short-term and incredibly dishonest PR stunts to support their “bogus patents!” campaign, a campaign that they are prosecuting on many fronts, including lobbying, campaign contributions, purchased think-tank work, and more. But that’s just my theory, Yet Another Theory, like what @bertdanner proposed, and what I guessed could conceivably been theorized within Google. Maybe you have a better one, that shows why Google was actually being very smart.

      • http://www.asymco.com Horace Dediu

        The really curious hypothesis I entertain is that Google’s lawyers were not even asked their opinion on the Moto acquisition. There was no due diligence process. The deal was done in 2 weeks and due diligence started *after* the MOU was signed and the press release was issued and after the $3 billion penalty for early withdrawal was agreed upon. The whole thing looks to me to be a setup whereby Motorola used the threat of litigation against the Android ecosystem to force Google’s hand. Not unlike the threat of defection was used by Nokia to force Microsoft’s hand. It’s the equivalent of putting a gun to one’s own head and saying “pay up or I’ll shoot”.

      • Walt French

        I didn’t bother to mention it, but I absolutely believe the broad outline — the notion that Motorola was willing to threaten a suicide bombing of the Android system—of your thesis.

        But Messrs Page and Brin are too smart, imho, to have not asked for an opinion or two before directing the acquisition; they have been very savvy/cagey about matters of corporate control. Thus, Google responded to the threat rationally under a weird value system where short-term control of reputation/PR posture was the primary goal.

      • Kenton Douglas

        I just think it was a very good deal overall – one too attractive to walk away from. Patents (and the narrative they built around them) are somewhere down the list. For me, ahead of that would be:

        1) Talent acquisition.

        - Lots of talented Android engineers

        If you look at the detail of the ‘redundancies’ that took place at Motorola, you will see thousands were actually transfers directly to Google. At the system (firmware) level Motorola were/are arguably only behind Google themselves and Intel in terms of Android skills. Look at the “Webtop” technology from 2010, when in 2013 people are talking about merging ChromeOS and Android – they’d already achieved this (using Firefox as the desktop browser).

        - Lots of talented Mobile Hardware Engineers

        They got a going concern with mobile hardware engineering skills that are as good as any in the industry. They were only limited by available resources in a failing company. Even now, while still in transition they can produce a device (Moto X) that’s architecturally (not raw performance specs) competitive with anything on the market – new iPhone 5s included.

        - Lots of talented RF technology engineers

        Again, in terms of skills in DSP, 2G, 3G, 4G LTE and point-to-point radio communications (iDen) it was a good deal. They also gain access to a lot of technology from Motorola Solutions. Outside of phones I think we’ll see these skills utilised on Project Loon, and/or their involvement with Planetary Resources, and/or their involvement with O3b Networks. They basically want the capability to rival the bit of Nokia MS didn’t buy (NSN) using satellites (and balloons for reach if that bit works). The acquisition helps greatly here.

        2) Android insurance policy

        In the event that the OHA blows up (I’d say it’s 50/50) they can scale up Motorola from it’s current designation (Supra- regional) to a fully global operation if required. Meanwhile, the main goal of the Nexus program (with chosen partners) should be to establish those wider distribution channels – and the direct sales model. Similarly, Motorola can join in with Chromebooks if needed.

        3) Patents

        To the extent that they were not acquired by MS, Apple, or other rival (“we bought them to protect the ecosystem [from attack using Motorola patents]“). But, they also underpin everything in 1) and 2). They are also tied up in some key cross licensing deals (e.g. Nokia and 4G LTE). Also, I think any cursory analysis at the time of acquisition would have have confirmed that the existing portfolio was largely built on existing fixed-income FRAND type patents, and as such the scope for use would be limited (ahead of any pronouncements from the DoJ, FCC, EC). They do however provide some income for a much scaled down operation. Also, I would agree that part of it was to fully engage the debate around patents in general.

        4) All of the above for a good price.

        I think the final nett cost should be in the order of $1.5-1.8B due to cash on hand, the stack of tax credits Motorola held domestically and Internationally, and the sale of the Home Division. They’ve gone through about the same operationally through restructuring. Therefore, the total outlay is in the region of $3-4B. I think that’s a fair deal for the talent, technology, ongoing (but currently reduced) device sales, and of course approx 18K issued, and approx 10K pending patents. So overall I don’t see panic, or desperation in this at all. It was probably planned well in advance. Remember, the bid of $PiB for the Nortel patents, which sold for $4.5B? Looks like a clever piece of misdirection to me – they were never serious about that portfolio. Motorola was always the target.

        That’s it as as far as a “theory” goes :)

        NB. The MS-Nokia deal looks similar. Of course structurally there are key differences (a vastly superior product distribution being one), but you could break it down across similar categories: talent, a Windows Phone insurance policy where “Nokia” can also sell Windows RT devices if needed, ongoing (but currently reduced) device sales, and (a licence to) patents. All for a good price. I’ve read the nett after tax write-downs should be about $4.5B before restructuring costs. It’s also just as calculating in how it was conceived. The only question is what happens to Blackberry? I wouldn’t be surprised to see a move from/including Nokia! Qnx being the target with mobile (in-car) mapping in mind.

      • Walt French

        As you say, it’s a theory.

        1. Talent grab. Google replaced all the upper management and simply let go what—a quarter?—of the staff. They sure could’ve homegrown/hired all those people, the way that e.g., Apple did, if they’d wanted them before Jha and Icahn did the suicide bomber offer that Horace notes. I’m used to Google doing things on what looks like a whim, but this whim was followed by decimating the team they acquired.

        2. Android blowing up is also explicitly the opposite of what Google says it was trying to do with Android. People are now noticing that 80% of the world’s smartphones are Androids and Google needs to protect itself from Microsoft putting Bing everywhere on mobiles?

        3. Patents: there are two kinds of note: the standards-essential ones that Google has been slapped pretty hard for trying to (essentially, improperly/illegally) enforce against their obligations (which I noted). And the standard “utility” ones, e.g., the email one that Moto got an injunction against Apple over (which now appears to be stayed on its way to oblivion). (There don’t seem to be any “trade dress” design patents in Moto’s IP suite.)

        Utility patents protect an actual inventor from somebody else stealing their work. Old utility patents do no such thing, because either they are too irrelevant—tech has marched on—or they’re too flimsy to stand up in court. Microsoft has muddied the waters by claiming that mostly its patents are “defensive,” allowing them to tie somebody up in court if they dare sue, but the patents didn’t stop people from suing Motorola and there’s no evidence that they’re stopping people from suing Google.

        4. Good value. HP wasted only $1 billion to buy out Palm, and Microsoft caught the falling knife of Nokia for about the same amount as you figure Google paid out net, for what was recently the #1 firm in the industry. But this point is at least debatable, while the other ones don’t stand up to any scrutiny.

        Mostly, my post addressed the PR line that Google pushed, that the acquisition was primarily about Moto’s patent portfolio. You haven’t done anything to show that those patents have yet, or anytime soon will, give Google anything other than grief if they try to press them as they have been doing, and a modest, not-affecting-competition revenue stream if they use them properly. Those patents only could have the dramatic value if Google’s “bogus patent” story line is actually wrong, so it’s no surprise that people get confused about what the real reason was for buying Moto.

      • Kenton Douglas

        1. They’ve retained about 4.5K within Motorola. The rest were mainly transfers to Flextronics (about 10K of the original staff were in manufacturing) and directly into Google from what I understand. They probably did let go about 2.5K of the roughly 20K staff they acquired. As stated, one of the principal motivations for the move was hiring skilled and experienced engineers is directly relevant fields. The Jha and Icahn double-act was just part of the theatrics. It actually helped to get the deal through.

        2. Motorola guarantees a Google controlled/directed OEM for Android (and ChromeOS). There’s nothing to stop Samsung (with or without others) forking Android tomorrow. MS would be glad to offer Windows Phone and/or (Bing) web services in lieu of the patent licence fees most OEMs pay them now to use Android (notably excluding Motorola). It’s a serious incentive for MS precisely because Android holds a 80% market share.

        3. Google hasn’t initiated any new claim since the acquisition closed. All cases against Apple, MS, etc were started pre-acquisition. You could argue a case suggesting that they might have cancelled those actions. But why would they? On one side you have ‘thermonuclear war’ (principally against Samsung and HTC), and on the other you have MS trying to litigate you out of business in Europe, while undertaking every lobbying and negative advertising option available. If they do start a proceeding it’ll be in response to a claim initiated against them – I’m pretty certain of that. I’m not aware of any fresh (Motorola related) claims against Google since the deal closed. They did settle with TiVO, but again, that was a pre-acquisition case.
        The FRAND patent system is largely dead going forward. Nobody is going to trust the value of their IP to the vagaries of the Courts. Therefore, the value of the existing Motorola FRAND portfolio lies in the income from existing and future licenses, and the cross licensing deals attached to them. Google would have know all of this going in. On the other hand, Utility patents are what they are. Therfore, the pending 10K (and future) patents are likely to remain as utility – where applicable.

        4. And, yes, I think it was it was mainly PR in relation to the patents narrative. I’m assuming this was to appease the OHA members into believing that Motorola would not be a huge threat. Their actions in scaling back operations would back this up. My response was to highlight why I thing they proceeded with the deal: acqui-hire, insurance, patents, and an overall good deal financially.

  • davel

    I am confused as to what priorities Microsoft would get from Nokia.

    Yes. Ballmer repeats again and again that Microsoft is now a devices and services company. I understand that Nokia makes some really neat devices, but their software efforts are not that good. To wit, when the iPhone hit the market they were not able to bend Symbian into something good enough to counter the software side of the equation. I read some blog that was created by a developer within Nokia that did not paint a pretty picture of how they went about their software efforts. I see hardware as the how not the why. Clearly Microsoft needs talent in hardware and so buying your hardware provider for phones makes sense in that regard. I am not sure that they will add that much from the why perspective.

    Also Nokia is keeping Maps which is the big software piece that Nokia contributed to the Windows platform.

    As for Jobs and the Next acquisition, again Next was not the why. Jobs was the why. Next was the how. Next provided the plumbing that Apple was incapable of doing on its own. They spent a decade in a fruitless effort to come up with the next generation OS and failed at least twice. So they bought Next so they have a solid foundation ( Unix ) on which to put their software on.

  • Carl Malartre

    For those interested in learning more about RPPs, Resources, Processes, and Priorities, I really liked Harvard Business School – Assessing Your Organization’s Capabilities: Resources, Processes, and Priorities by Clayton M. Christensen, Stephen P. Kaufman, 16 pages. Publication Date: Sep 13, 2006. Prod. #: 607014-PDF-ENG. Maybe Horace has some other references. http://hbr.org/product/Assessing-Your-Organizati/an/607014-PDF-ENG