) announced on Tuesday that it has agreed to buy
) mobile phone division for $7.2 billion. The acquisition wasn't
entirely novel; in 2011,
) made an almost identical purchase of Motorola's mobile business.
For better or worse, vertical integration has become a trend in the
smartphone industry. Software companies now want to sell you
hardware, too -- an approach made famous by
), which developed both the iPhone and the operating system that
runs on it.
It's a little absurd, then, that both Microsoft and Google owe
their success to a lack of vertical integration. Android took off
in smartphones for the same reason that Windows conquered the PC:
The operating system wasn't tied to the decision-making ability of
a single firm. Hundreds of manufacturers have come out with Droid
almost all of them are losing money
. Countless form factors, sizes, and price points have been
introduced, and many of them have fizzled.
(OTCMKTS:SSNLF) sells dozens of lines of smartphones, and it struck
gold with exactly
one of them
. This process of trial and error isn't pretty, but it is
effective; the market has consistently embraced open operating
systems like Windows and Android. More than any other company in
living memory, Apple has excelled at anticipating consumer trends;
its reward has been a market share of less than 10% in PCs and an
ever-dwindling piece of the smartphone market.
Google and Microsoft are now poisoning the well. Their entry into
the hardware business means that they're competing with the
partners that made them successful -- a conflict of interest that
could very easily drive those partners elsewhere. For Google, this
means a potential loss of market share to newer, more genuinely
open operating systems like
. Samsung is already
threatening to take its marbles elsewhere
, and other device makers are using such old or heavily-modified
versions of Android that, for all intents and purposes, they
already have one foot out the door. Microsoft, on the other hand,
is faced with the Herculean task of getting Windows Phone off the
ground. Nokia's dominance was already a roadblock for other
manufacturers looking to enter the race; now that Microsoft has
thrown its weight behind the Finnish phone company, that roadblock
has become more like a barricade.
There's no reason to expect either Google or Microsoft to design
great hardware. They struggle to produce great software; successful
side projects are as rare at Google as happy customers are at
Microsoft. For both companies, the typical approach to new products
has been to throw everything at the wall and see what sticks.
Software monopolies live a charmed life; they can generally stumble
their way into the future with only a few bruises to show for it.
Hardware firms, on the other hand, live and die by their next
product. Apple has one shot each year to debut a compelling iPhone,
and a misfire would carry huge consequences. There's little room
for trial and error in a world of physical costs, when each new
product involves an expensive rollout and heavy marketing costs.
Pundits have offered that Microsoft has experience in hardware, and
this is true. But the mobile market bears little resemblance to the
console gaming industry, where the Xbox has faced only geriatric
Redmond entered a far more competitive space when it introduced the
Surface tablets, and the results are well known. The duo achieved
only mediocre sales, and the Surface RT suffered a $900 million
write-down. Another consequence might also be observed: Microsoft's
partners have been avoiding competing with Surface, and instead
focused their efforts on convertible and touch-screen laptops. With
one product, Microsoft has defined -- and perhaps killed -- the
Windows 8 tablet. For all we know, Google may accomplish a similar
feat later this year when it releases the Motorola X.
It's unlikely that either Motorola or Nokia will offer much help in
the design department. Neither company showed much innovation in
life; it would be unreasonable to expect it from them after death.
Acquiring a business means acquiring its problems, and Google and
Microsoft now face the additional challenge of turning around two
brands with a long history of decline.
In other words, the prospect of either company producing a great
hardware device is poor, and the risk of them wrecking their OS
market share is high. Vertical integration jeopardizes traditional
sources of revenue -- software sales for Microsoft, and advertising
revenue for Google -- and trades the steady profits of a software
monopoly for the more unpredictable returns of a hardware firm.
Nokia's mobile assets may have been cheap at $7.2 billion, but it's
hard to see Microsoft's purchase as anything other than a bum deal.
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