Microsoft's Leaving These Companies in the Cold

Never underestimate the importance of finding the right business partner. For a fine counterexample, look no further than the companies involved in Microsoft's (NAS: MSFT) cell-phone efforts. The tech giant just announced that its upcoming Windows 8 mobile operating system won't be available for Nokia's (NYS: NOK) competitively priced Lumia 900 smartphone. That's a blow the reeling Finnish company will have a hard time recovering from. And it's not the only company that'll get hurt.

A series of stumbles
Microsoft's recent moves have been puzzling. Mere days before the mobile OS embarrassment, it tried an Apple (NAS: AAPL) -style product launch of its Surface line of tablet devices. The attempt at fanfare ended up sounding more like a raspberry, as the products didn't seem appreciably different from or superior to the Cupertino company's iPads (or any other tablet on the market, for that matter). Compounding the trouble was the company's refusal to be specific on minor details of the new products, like price and date of availability.

At least the Surface doesn't risk putting anyone out of business. The same can't be said for the mobile version of Windows 8. Nokia was betting heavily on the Lumia to finally give it an anchor in the lucrative American smartphone market. Although the company sells plenty of phones outside the U.S., many of these sales are of low-margin devices with yesterday's technology -- specifically, the company's clunky old Symbian operating system.


In a move at distinguishing itself from the competition on the domestic market -- namely, Apple and about a thousand phones powered by Google's (NAS: GOOG) Android operating system -- Nokia chose Windows Mobile to be its OS. Whoops! It was a gutsy call but the wrong one, given Microsoft's annoying habit through the years of not making its software backwards-compatible.

Emergency call
Nokia has little room for error. The company's Q1 this year was one of the worst reporting periods in its history. Revenues saw a queasy 26% decline over the previous quarter, and that wasn't even the ugliest figure. The company's net sales of smart devices cratered by 38%, while in terms of geography, total sales dropped 30% in Europe, its home market and the one it used to dominate. Its operating loss was a gasp-inducing 1.3 billion euros, or $1.6 billion at current exchange rates.

And that was far from the company's only loss. To bail out the sinking ship, it recently announced that it will pink-slip an additional 10,000 employees.

Now, with that blow lowered by Microsoft, the hemorrhaging will continue. Sales of the current Lumias should dry up almost completely. After all, what sane consumer wants to shell out hundreds of dollars in hardware and contract costs for a phone that won't run the latest software? This isn't a worry for users of Apple devices, for example, who can get OS updates quickly, painlessly, and free of charge through iTunes. Sure, the Lumia is attractively priced at less than $100, but that savings also buys a big hassle.

Partners in misery
At least Nokia can commiserate with the phone's carrier. AT&T (NYS: T) signed up to be the exclusive provider of the now-virtually obsolete device, in an attempt to broaden its offerings following the loss of its iPhone exclusivity. It's unknown how much the company had to pay for such a, erm, privilege, but it was revealed before launch that the company would sink $150 million into marketing the arrangement. This was, incidentally, more than what it spent to tout Apple's well-supported product.

AT&T's in better shape than Nokia -- which company isn't? -- but that $150 million and other costs associated with the roll-out is money that could have been used more productively, especially now that the company has to divide iPhone sales with rivals Verizon and Sprint Nextel. Both now sell the popular device -- in their most recent quarters, AT&T activated 4.3 million of the Apple phones, while Verizon's total was 3.2 million and Sprint's a bit over 1.5 million. AT&T needs a hot new market-pleasing product to help it compete, not a dud callously made obsolete by its software provider.

A shot to the foot
The final notable victim of this incredible stumble is Microsoft itself. Like AT&T, the software monster could use a big win. Absent any fresh, interesting product in the past few years, the company hasn't seen its share price move much in the past five years.

Its activity in mobile looks like a non-starter; in the U.S. this past April, for example, Google's Android had a 51% share of the smartphone platform market, while Apple was No. 2 at 31%. Microsoft? It was a distant and nearly unnoticed fourth, at a mere 4%.

This is a company that's going nowhere in the mobile sphere (and probably in tablet computing, while they're at it). It's just too bad it has to bring other companies there with it.

At least Microsoft provides a dividend, which is not a common habit in the tech sector. This is, however, standard and then some for the companies we profile in our free report "Secure Your Future With 9 Rock-Solid Dividend Stocks"; download your copy.

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The article Microsoft's Leaving These Companies in the Cold originally appeared on Fool.com.

Fool contributor Eric Volkman owns no stocks mentioned in the story above. The Motley Fool owns shares of Microsoft, Apple, and Google. Motley Fool newsletter services have recommended buying shares of Microsoft, Apple, and Google and creating bull call spread positions in Apple and Microsoft. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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harryE

For what just happens with Nokia + Microsoft WP7 we should rename the Osborne Effect to OSburn Effect :-)

July 18 2012 at 9:17 AM Report abuse rate up rate down Reply