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Why Nokia is Doomed

Feb 18 2011

Back in 2007, sitting in a 24 hour Mexican Food joint, talking technology with another successful startup veteran, I said "I think it's 1995 for mobile."

What I meant was 1995: the year of the Netscape IPO. The year I first remember a friend telling me about writing CGIs to generate dynamic content. The web was already four years old at that point, and I'd known and used it myself for over a year, but I'd seen it largely used as a static presentation medium. When my acquaintance helped me make the connection between submitted forms and dynamically generated markup, the weight of all the potential hit me, and I knew the activity we were seeing surrounding the web was only a hint of what was to come, and that there were going to be all kinds of software opportunities as it grew.

By 2006, it was obvious we were heading in that direction for mobile devices as well. But I think now that when I made the comparison between the two times over tacos, I was roughly off by a decade. And it has everything to do with why I think Nokia has sealed their doom by partnering with Microsoft.

It was in the 1980s when desktop computing (like mobile computing) was new, hot, and chaotic, when there were dozens of vendors pushing as many platforms (sometimes more than one per vendor), and when "killer app" became the term for applications that defined a category and provided reason alone to buy a new system. It was the 1980s when Apple had already defined a new market for computing and was reaching to refine it further, exerting extra levels of control over their hardware and the software experience.

And it was during 1980s when Microsoft made a deal with a then-dominant purveyor of hardware who believed all they needed to get a leg up in the rapidly growing desktop market was a software partner -- who, however essential, would be the minor partner in the arrangement, since the money was in machinery and not the software, right?

It was between then and 1995 when the platforms shook out, and more or less left Apple and Microsoft as the last two standing. In the meanwhile, hardware had begun the process of becoming a commodity (though growth) market, and the value shifted up to the software stack and then, later, towards the network (or, as we say now, "the cloud").

There are some things that are different in the world of mobile this time, of course. For one thing, a good chunk of the value of the software world is still in the network... making any device with full-web features potentially competitive. And this time, rather than Microsoft, it appears that Google and its Android platform are is actually the most likely candidate for the dominant mobile operating system.

But the deal between Microsoft and Nokia smells an awful lot like the MS-IBM deal of yore to me -- a former powerhouse realizing it's late to the next game, abandoning its own internal capacity to control its product destiny, apparently assuming that third-party software will be the ticket to continuing to move hardware in an emerging market.

Here's what I think will happen if things go well for the new partnership:

The new phones will look good. They'll be solid hardware, and Windows Phone will not disappoint. It'll be pretty, the basic functions and software everyone expects (sms, social, email, web, and probably some nice MS Office related stuff) will be present and satisfactory. The trade press will laud it as a worthy competitor. Microsoft will reveal convenient tools for developers (particularly those who've centered their careers around its software stack) to rapidly develop apps for their own app store, which won't compete with Apple or Android on entries for a while, but it'll be good enough, particularly on the consumer end of the market where MS and Nokia will push hard by sweetening deals with carriers and throwing a lot of money at advertising and promotional campaigns.

What will happen next, though, is that just like it did over the last 30 years, hardware will become cheaper, smaller, more powerful, and even more specifically integrated.

We're already seeing package on package assembly for cell phones. Within the next few years it's likely that we'll see handset hardware that is essentially system-on-a-chip. At first it may not be competitive with custom assemblies. Over time, it will, and it will become less and less inexpensive. The unsubsidized pocket communications and computing will come down by a factor of 10; a new device with hardware capabilities that meets or exceeds that capacity today's high end devices will possibly be priced at less than the cost of a month or two of service (this, incidentally, may mean the end of carrier contracts and perhaps even diminish the carriers as a gatekeeper-like point of sale for handsets, though it's possible they'll still do brisk business).

Nokia will be competing in this hardware market. They'll be competing against others who will pay little to nothing per unit for licensing Android (or perhaps another Linux distribution they can use freely). But for their software, they'll be relying on a partner whose business model is built almost entirely on operating system royalties. Who, in the meanwhile, may even have courted other hardware makers who are willing to build and sell cheaper to make up for the lost margin spent on Windows Phone licensing costs.

So, as a hardware manufacturer, Nokia can probably look forward to being where Lenovo or Dell is today.

Of course, Nokia has and will have a certain other value for a while: their patent portfolio. When their market cap dips and the company is a much more affordable buy than it is today, this might be a particularly appealing buy for a company that's used to doing business with strongarm and tollbooth tactics.

Which is to say: don't fret, Nokia. Microsoft may be just using you now, but there's a good chance it'll marry you for your assets in the end.

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