Did the Surface write-off cause Microsoft to buy Nokia?

I’ve read a lot of speculation the past couple days about why Microsoft went ahead and pulled the trigger on the Nokia acquisition. Some say that Nokia was in a worse financial situation than most believed. Others say that they were threatening to switch to Android. Still others posit that this was the plan all along, ever since Elop took the reins at Nokia.

What follows are my own thoughts about what may have led to the buyout. But first, I want to address the question of whether this was Microsoft’s “master plan” all along. I would say no. I don’t have any inside information on this, but I do think my experience at Microsoft affords me a somewhat different perspective from which to speculate. That in mind, here’s what I think the senior leadership may have been thinking when the Nokia arrangement first came about:

First, Microsoft looked at the marketplace and saw two things: Android taking the largest piece of the mobile pie with a variety of OEMs (following a particularly Windows-ish model), and Apple taking the smaller but most profitable chunk, just as they had been doing to the PC market with the Mac for several years. Some things to note are that a lot of Microsoft folks had developed a lot of respect for Apple’s emphasis on design and polished experiences, and a not-so-small bit of envy for the margins those things afforded them. Android, on the other hand, was (and I think often still is) looked down upon by Microsoft from both the design and engineering side of things.

Keep in mind, we’re talking about opinions of Android formed 2-3 years ago. Based on that, I think they decided that Android was a total mess. They looked at it and saw poor OS performance (particularly with the abysmal scrolling performance seen on anything but the beefiest hardware), battery life problems (my Droid Incredible might as well have been a landline phone), fragmentation, OEM crapware and lame skins, and a massive and growing malware problem… I remember jokes at one point about how ARM chip manufacturers like Nvidia had to start including extra shadow cores on their chips to work around architectural flaws in the Android core OS. Surely, the thinking went, Microsoft could beat them handily in engineering and design.

But just beating Android at their game wasn’t enough. Microsoft wanted it all. Or rather, they wanted in on both parties: the mass market OEM-driven game that Android was dominating, and the integrated end-to-end device experience from which Apple was raking in huge bucks.

It’s easy to see how this was meant to play out on the tablet side. Forget Windows 8 on the desktop, it would take that naturally, and its main “competitor” is Windows 7. If you think Microsoft was ever scared that Windows 7 would be “the next XP” on desktop or even traditional desktops, you’re not thinking clearly. Folks there would sleep perfectly well at night were that to be the case.

The real point of Windows 8 was to take on Android tablets. It gets thrown over the wall to the OEMs and they build hundreds of different machines at every price point, sometimes with crapware and weird skins or “value adds” thrown in, and if they could succeed doing that with Android then they could succeed doing it with Windows 8.

Surface, on the other hand, was to fight on a different front. The base model (“RT” — ugh), would take on the iPad. The Surface Pro would go up against the MacBook Air. In this brave new world, the OEMs might be agitated, but they’d largely be unaffected and get over it. They weren’t showing any signs of being able to compete with Apple for that part of the market anyway, so why should the care if Microsoft takes a stab at it?

Windows RT, then, was sort of an experiment, and also a contingency. As several publications have reported, Windows RT OEMs had to be selected by the chip manufacturers, and “slots” for Windows RT OEMS were very limited. The idea was that Windows RT devices would be better (aka “more Apple-like”) than Windows 8 tablets where Microsoft’s influence was very limited. And if one of them somehow did a better job taking on Apple than Surface, that’d be perfectly fine.

Tangent: Funnily enough, I got the impression that some nameless unselected OEMs made a big stink before it was even released about “deciding” not to make Windows RT devices (much in the same way that I’ve “decided” not to date Jennifer Lawrence). At the time I thought they were just being spiteful and/or cute. Or that maybe I’d been wrong (I was never privy to the actual list of invited OEMs). But in retrospect they were fortunate enough to come off looking smart, given the lackluster performance of Windows RT thus far, and Microsoft not so much.

So back to Nokia and Surface. I suspect, with no evidence at all, that a similar plot was afoot for phones. In fact, what I think Microsoft really wanted from Nokia in the beginning was Windows Phone’s version of the Motorola Droid. A breakthrough device that gets the platform off the ground. With that, they could get other OEMs on-board in earnest, and start taking a bite out of Android’s sizable market share. Meanwhile, they’d prepare to unleash the power of their fully armed and operational hardware battle station, and take on the iPhone with their own thing. I don’t think of this as a use-them-and-lose-them play regarding Nokia. Rather, they wanted Nokia to succeed, but expected there would still be room at the top for a first-party thing down the road, much as they’d hoped things would work out with both Windows 8 and Surface.

So what changed?

Well, first, Nokia has yet to build that breakthrough Droid offering. Personally, I don’t see how they were supposed to do that. The success of the Motorola Droid was Verizon’s doing, not Google or Motorola’s. Scratch that, the real credit likely lies with Apple. And Microsoft. Apple, for maintaining exclusivity with AT&T, and Microsoft for failing to provide Verizon with an alternative to go all-in on. If there was ever hope of that happening, Kin burned that bridge and I think it’s still smoldering. So Google and Motorola gave it their best, which really was pretty terrible next to an iPhone, and Verizon took it and made it a household name. Apple either didn’t see this happening, didn’t care, or just couldn’t get out of their AT&T deal in time. When they finally did, Android had already hit critical mass, and Microsoft was still crapping out dead-end Windows Mobile 6.x turds that nobody wanted.

So how could Nokia do that? Well, the camera emphasis is a valiant effort. It’s been effective, but not to the degree that it really needs to be. So Nokia left to its own devices (slight pun intended) has not lived up to Microsoft’s hopes.

Secondly, Samsung. I think Microsoft has come to the realization that Samsung isn’t really an Android OEM any longer. They’re building their own ecosystem, and when the opportunity arises, they’re poised to fork Android or dump it altogether. They’re already not far off from Amazon’s level of Android bastardization. This suggests the OEM-model is less sustainable than Microsoft previously thought.

And finally, what may have tipped the scales: Surface failed to take off. Going into it, Microsoft had an endless amount of faith and confidence in its ability to build up an entire Apple almost overnight. I think the board likely drank that Kool-Aid (as so many of us did) and when success failed to materialize, they had a bit of a reality check. I can’t help but think that this influenced the timing of the Nokia acquisition.

I suspect Ballmer and the board had their finger on the “acquire” button all along, mainly to ward off a competitive acquisition or to save Nokia from drowning and leaving Microsoft with no one to throw a Windows Phone-shaped life preserver to. A year ago, saving Nokia may have seemed less crucial, had it come to that. After all, Microsoft could just build its own hardware and forget the whole software licensing side of things altogether if it needed to (unlike the PC market and big Windows, they really had nothing to lose by doing this). I don’t think it was plan A. Maybe B or C. But in light of the Surface write-down, I think that contingency suddenly seemed a whole lot more risky, and that finger over the acquire button got twitchy.