There are two divergent strategies playing out in the mobile business right now. Apple Inc. (NASDAQ:AAPL)‘s closed ecosystem keeps consumers in a uniform operating system and creates a consistent platform for developers to work on, although it means choice for both parties is limited. Google Inc (NASDAQ:GOOG)‘s open-source operating system, Android, allows device makers to modify the operating system to suit their own devices. This has helped create a larger selection of products and taken market share from Apple Inc. (NASDAQ:AAPL), with the downside that users are on inconsistent operating systems, some of which don’t even work well with Google Inc (NASDAQ:GOOG)’s own systems.
Microsoft Corporation (NASDAQ:MSFT) is trying bring in some of Apple Inc. (NASDAQ:AAPL)’s capabilities with its acquisition of Nokia Corporation (ADR) (NYSE:NOK)‘s handset business, building a consistent operating system and also having more device options.
Big risks for Microsoft
Apple Inc. (NASDAQ:AAPL)’s closed system has clearly been a success in smartphones and tablets, keeping consumers within the company’s ecosystem of apps, music, and movies. This helps the company draw consumers into new devices like Macs and Apple TV, which can access a user’s data and content. The closed system just makes sure all of these devices work together properly.
Microsoft Corporation (NASDAQ:MSFT) will try to create a fairly closed operating system as well, but instead of leveraging smartphones to expand into tablets and PCs, it will leverage a dominant share of the PC market to draw in smartphone and tablet users. In the end, if Microsoft Corporation (NASDAQ:MSFT) can create a more consistent platform than Google, it will be able to fit into the market between Apple Inc. (NASDAQ:AAPL) and Google’s offerings.
The strategy is working slowly in tablets. Windows 8 has grown as PC makers have expanded into convertibles and tablets and Microsoft Corporation (NASDAQ:MSFT) has grown tablet market share from 1% a year ago to 4.5% last quarter. But Microsoft needs a critical mass in both tablets and smartphones to attract developers and users to its ecosystem. One brings the other and a reinforcing loop occurs.
That’s why the acquisition of Nokia Corporation (ADR) (NYSE:NOK) comes now. Nokia has been drowning in losses the past two years, leaving it financially incapable of competing with Apple Inc. (NASDAQ:AAPL) and Samsung‘s marketing. The Lumia line of phones running Windows has actually gotten decent reviews and taken some share, it’s just not enough to make either Microsoft Corporation (NASDAQ:MSFT) or Nokia a big winner in mobile. Since Nokia accounts for 80% of the Windows smartphones, the easy option is to just buy Nokia and use Microsoft’s balance sheet to fuel both research and development, as well as marketing of Nokia devices, even if it alienates some other smartphone manufacturers.