The Hidden Risk in Microsoft's Nokia Purchase

The Hidden Risk in Microsoft's Nokia Purchase

Microsoft's decision to buy Nokia's handset business appears to carry little risk. With roughly $80 billion in cash on its balance sheet -- much of it overseas -- Microsoft can easily afford Nokia. If it works out great, and if it doesn't, no big deal -- right?

Not really. Microsoft's decision to double down on hardware risks alienating a core group of its customers -- OEMs. With Google offering legitimate alternatives to Microsoft's operating systems, Microsoft's decision to get into hardware could accelerate the decline of its Windows business.

Microsoft's new strategy
Microsoft'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'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 deal, Microsoft'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's purchase of Motorola Mobility: If Google favored Motorola, it would be at the expense of its other hardware partners. But thankfully, Google 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 is doing the complete opposite, integrating Nokia directly into Microsoft. Stephen Elop, Nokia'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 has over 80% of the Windows Phone market -- it's really the only company that matters.

While that's certainly true, Microsoft's decision to double down on hardware risks pushing OEMs away from its other operating system, Windows itself. Microsoft's hardware partners have openly criticized its hardware strategy in the past; committing to it seems likely to only anger them further.

Last year, in regards to Microsoft's Surface tablet, Acer's CEO JT Wang publicly urged Microsoft to "think twice" about getting into hardware. Wang argued that by building its own hardware, Microsoft was going to hurt the overall ecosystem.

Hewlett-Packard, too, has distanced itself from Windows. In an earnings call back in May, CEO Meg Whitman avoided mentioning Windows directly; last month, she emphasized HP's commitment to "multiple" operating systems.

Google's alternative operating systems
But "multiple" operating systems really just means Google's. This year, HP has cozied up to the search giant, releasing three major devices running Google's operating systems. The Slate 7 and SlateBook x2 run Android; HP's Chromebook runs the popular Chrome OS.

Acer has been Google's partner for quite a while; its Chromebook was one of the first on the market, and it's been making Android tablets for quite some time. Acer is even planning a Chromebox (a desktop running Chrome OS) that could cost just $99.

Obviously, neither Android nor Chrome can completely replace Windows right now or in the near-future; but longer-term, OEMs might be eager to make them work.

Nokia could cost a lot more than $7.17 billion
In the end, Microsoft's decision to buy Nokia could cost the company a lot more than the $7.17 billion it paid.

By bringing Nokia's handset division into the larger Microsoft corporation, the Windows-maker is affirming its commitment to making its own devices. Unfortunately, that decision could alienate its hardware partners, driving them into the arms of Google. Although Windows remains a necessity for many PC users (for now), OEMs could be heavily incentivized to change that.

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