Nokia & Microsoft: $1 Billion Deal to Save Them Both?

I have been fascinated to read the prognostications around the recent deal between Nokia and Microsoft (watch my podcast on this topic). In a nutshell, Microsoft will pay Nokia $1 billion, and in exchange, Nokia will abandon its Symbian mobile phone operating system and switch to Microsoft's Windows Phone 7 (WP7). Although the stock prices of both companies have fallen since this announcement, people generally believe this is a good move for each business.

Yet many naysayers still persist. They argue that Nokia is foolish to abandon the software business. They say this is like Yahoo abandoning the search business and making way for Google, or similar to Borders giving up online retailing--outsourcing to Amazon--while its chief competitor, Barnes & Noble, built bn.com. Today Borders is near bankruptcy and Yahoo has long lost its leading spot in the .com hierarchy.

But this strategy, giving up one front to win another, has a far deeper precedent.

During the Warring States period in China, the royals and generals regularly entertained themselves by gambling on races among their private stocks of horses. The stakes were high. One day, a well-known military advisor and descendant of Sun Tzu named Sun Bin noticed that General Tian Ji was preoccupied. When Sun Bin inquired, the general explained that his horses, which regularly lost, had cost him significant sums of money. Sun Bin offered to accompany the general to the next match to see if he could devise a strategy whereby the general would win.

At the race, Sun Bin learned that the races consisted of three heats: the best horses competed in the first heat; the second-best horses in the second; and their worst horses in the third. Sun Bin noticed that the general's horses were slightly slower than the competition. This was enough information for Sun Bin to devise a strategy that would ensure General Tian Ji victory.

Sun Bin told General Tian Ji that he had a plan, and suggested that the general call another race and be prepared to bet heavily on it. The general had great confidence in Sun Bin, so he planned a high-profile competition, at which the prince and thousands of peasants and royal subjects were to attend. He put both his finances and his reputation at risk.

In the first heat, Sun Bin advised the general to race his worst horses against the prince's best. The prince easily defeated the general. The crowd cheered, the prince smiled confidently, but Sun Bin remained calm.

In the second heat, Sun Bin advised the general to race his best horses against the prince's second-best horses. The general's best horses, although no match for the prince's best horses, easily defeated the prince's second-best horses. The score was tied one to one.

In the final, deciding race, the general ran his second-best horses against the prince's worst horses and won. By sacrificing his worst horses, General Tian Ji won the tournament and recouped a large share of his losses.

The principle here is that you are often better sacrificing one front to become outstanding on another.

Steve Jobs says he is proud of the things Apple doesn't do. Intel has long benefited by the policy of staying out of its customers businesses, avoiding entering the hardware business for example. QUALCOMM transformed from a third- or fourth-rate player into a technological juggernaut when it abandoned its hardware business to focus purely on developing patentable intellectual property.

Sure, Nokia is giving up a compelling vision. The company's strategic shift leaves Apple and RIM as the only major mobile phone companies to combine proprietary hardware with their own operating system. But Nokia joins a new game - one that HTC shows can be just as interesting.

On top of the strategic benefit of focus, the deal offers many other advantages. The Nokia platform has always lacked the following of app developers on which mobile phones so heavily compete now. Microsoft has the potential to bring that. Nokia's mapping business, which is part of the deal and will be adopted by Microsoft, will soon grow many times its size. And Nokia can begin cutting down the nearly $4 billion it spends on R&D every year.

Microsoft meanwhile gets a chance to bring its Windows Phone system to a global market, offering it to a base of loyal Nokia enthusiasts, behind a well-loved brand name that dominates in emerging markets and in the low-end smartphone market. Microsoft's search engine, Bing, could dramatically expand its share of the mobile search market. Some analysts believe that could eventually be worth $1.25 billion per year.

If this move is successful, then it may realign the mobile ecosystem. Intel, which had bet on a deal with Nokia to finally become a player in the mobile phone business, has now been set back. Meanwhile, QUALCOMM will benefit. Android may even benefit in the short term, during the year or two during which Nokia does not yet offer a Windows mobile phone and consumers, unsure of whether to buy a Nokia phone that may not be supported for long, seek other options.

In summary, the two companies may not have had a choice. Both were performing so poorly in the mobile phone business that they needed to find a radical move. But history tells us that this move makes sense. By sacrificing one front you often improve your chances of winning the war. While some players surely lose out because of the deal, the overall ecosystem benefits. Ask yourself the questions below and see what front of your battle may be draining your energy.

1. What would happen in five years if you were no longer fighting on that front?

2. What other player could take that front off of your hands?

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1 Comments

  • Peter

    Nokia may be right to abandon Symbian. They are wrong to joing microsoft. Nokia should have chosen Android.