The Hidden Risk in Microsoft Corporation (MSFT)’s Nokia Corporation (ADR) (NOK) Purchase

Microsoft Corporation (NASDAQ:MSFT)‘s decision to buy Nokia Corporation (ADR) (NYSE:NOK)‘s handset business appears to carry little risk. With roughly $80 billion in cash on its balance sheet — much of it overseas — Microsoft Corporation (NASDAQ:MSFT) can easily afford Nokia Corporation (ADR) (NYSE:NOK). If it works out great, and if it doesn’t, no big deal — right?

Not really. Microsoft Corporation (NASDAQ:MSFT)’s decision to double down on hardware risks alienating a core group of its customers — OEMs. With Google Inc (NASDAQ:GOOG) offering legitimate alternatives to Microsoft’s operating systems, Microsoft’s decision to get into hardware could accelerate the decline of its Windows business.

Microsoft Corporation (NASDAQ:MSFT)Microsoft’s new strategy
Microsoft Corporation (NASDAQ:MSFT)’s recent reorganization aims to orient the company around “devices and services.” Rather than stick to software as it has in the past, Microsoft is getting into hardware, adopting Apple‘s long-standing strategy of making its own hardware for its own software.

Microsoft has had its own tablets, the Surface RT and Surface Pro, for nearly a year, and by buying Nokia Corporation (ADR) (NYSE:NOK)’s handset business, Microsoft is reaffirming its commitment to hardware. Now Nokia’s Windows phones will be made strictly in-house. Microsoft’s management has said that by acquiring Nokia’s business, it will be able to innovate more quickly and run a unified marketing effort.

Driving away OEMs
In its presentation of the Nokia Corporation (ADR) (NYSE:NOK) deal, Microsoft Corporation (NASDAQ:MSFT)’s management argued that purchasing Nokia would benefit its OEM partners. That’s absurd.

Although Nokia dominates the Windows Phone market, it is not the only OEM. Samsung and HTC also make Windows Phones, but probably not for much longer. Why waste money supporting a mobile operating system when you have to compete with Microsoft itself?

Back in 2011, some doubted Google Inc (NASDAQ:GOOG)’s purchase of Motorola Mobility: If Google favored Motorola, it would be at the expense of its other hardware partners. But thankfully, Google Inc (NASDAQ:GOOG) chose a different route, adroitly running its Motorola division as a wholly separate company, giving it just as much access to Android as other manufacturers.

Microsoft Corporation (NASDAQ:MSFT) is doing the complete opposite, integrating Nokia directly into Microsoft. Stephen Elop, Nokia Corporation (ADR) (NYSE:NOK)’s CEO, will be in charge of Microsoft’s devices division, and is now widely considered to be the odds-on favorite to succeed Steve Ballmer as CEO.

Could Microsoft’s partners abandon Windows?
But who cares if Samsung and HTC give up on Windows Phone. After all, Nokia Corporation (ADR) (NYSE:NOK) has over 80% of the Windows Phone market — it’s really the only company that matters.