Markku Ulander Lehtikuva From left, Nokia's new CEO Timo Ihamuotila, Chairman of the Board Risto Siilasmaa and former Nokia CEO Stephen Elop stand together during Tuesday's news conference, a day after Microsoft announced it had bought the company.

Microsoft bets on Apple-like revival

Published: Wednesday, Sep. 4, 2013 - 12:00 am | Page 1A

SEATTLE – With its purchase of Nokia's phone business, Microsoft is taking inspiration from Apple's way of making products, bringing hardware and software under a single roof where they can be more elegantly woven together.

But Microsoft already bears a striking resemblance to Apple – the Apple of two decades ago, not the trailblazer of the mobile era. The $7.2 billion Nokia deal is unlikely to change that and catapult Microsoft up the ranks in the smartphone market.

That is because Microsoft, with its Windows phone operating system, is stuck in third place in that market, where all the oxygen has been drained by more established players.

Apple and Google have won the hearts and minds of developers, who design the apps that lure consumers to their devices, while Samsung is the dominant maker of mobile phones, most of which run Google's Android operating system. Even though Microsoft's and Nokia's products have won praise for their quality, they have arrived late.

"What matters is not the phone, per se, but a dynamic app and services ecosystem," said Brad Silverberg, a former senior Microsoft executive who is now a venture capitalist in the Seattle area.

Microsoft's predicament is a flashback to the situation Apple found itself in during the early 1990s. At that time, Apple arguably had a superior computer product, the Macintosh, but it languished as PCs running Microsoft's Windows operating system engulfed most of the market. One of the biggest problems for Apple then was that Microsoft had succeeded in gaining the allegiance of software developers, who produced a bounty of applications.

"They're stuck in the same vicious cycle that Apple was in 20 years ago," said Benedict Evans, an analyst with Enders Analysis, a research firm, and a former strategist in the wireless industry.

The challenges for the marriage of Nokia and Microsoft go far beyond support from developers.

Microsoft is in the midst of the biggest organizational changes in its 38-year history. In mid-July, Steve Ballmer, Microsoft's chief executive, unveiled a plan to restructure the company's often-clashing fiefs into business groups designed to cooperate more.

While the new organization seemed to set up Ballmer as the maestro in charge of keeping the various groups in harmony, he stunned the tech industry late last month by announcing his plans to retire from Microsoft within 12 months. Ballmer said he was leaving earlier than planned because he felt the company needed a leader prepared to stay longer. That fueled speculation that Ballmer was encouraged to leave by Microsoft's board.

Blending a major acquisition into a company is challenging enough in times of calm; doing so with the unexpected management change at Microsoft could make it even harder, tech industry executives and analysts said.

"The issue I wonder about is the amount of complexity Microsoft is taking on its business by absorbing Nokia at the same time it is reorganizing at the same time Windows 8 is faltering," said Michael Mace, a former executive at Palm and Apple who now runs an app development company in Silicon Valley, Zekira. "It's scary from that standpoint."

While Ballmer plans to leave Microsoft after a successor is found, he was very much involved in cutting the Nokia deal.

During the past several months, Ballmer and his deputies met in such places as Redmond, Wash., London and Helsinki with counterparts in the talks, led by Risto Siilasmaa, Nokia's chairman. The style of Ballmer, an exuberant leader with a booming voice, was a stark contrast to the reserved, gentlemanly manner of Siilasmaa, according to a person present during many of the meetings.

Microsoft is under enormous pressure to reinvent itself for a world where mobile devices are the animating force in technology, rather than personal computers. Sales of PCs are suffering the most prolonged decline in their history.

Two powerful pistons of Microsoft's business – Windows and the Office suite of applications – are tied closely to the health of the PC market.

The Nokia deal plunges Microsoft deeper into hardware than ever before. It is a business with enormous complexities – managing sprawling overseas supply chains, for one – that are not as prevalent in the software business.

While it has had success in hardware through its Xbox video game console, Microsoft has also badly stubbed its toe in this area. It recently took a $900 million charge stemming from slow-moving sales of Surface, a tablet computer it designed to compete with the iPad.

Unlike some companies such as BlackBerry that have missed technology shifts, Microsoft still has vast financial resources that could give it a lot of room to develop a mobile strategy that produces results. Because of the huge profits it makes from its flagship software business, "Microsoft has choices most companies don't," said Bill Whyman, an analyst at ISI Group.

Nokia remains the second-biggest maker of cellphones in the world, when inexpensive feature phones are considered as part of the calculation. The company has footholds in large emerging markets such as India that could eventually move to smartphones.

Microsoft and Nokia became partners more than two years ago, when Nokia agreed to standardize its smartphones on Microsoft's mobile operating system.

In an interview on Monday night, Ballmer said he believed that Microsoft and Nokia had "done incredibly well in the last couple of years" in the mobile market. He added that the Windows Phone operating system had emerged as a "clear No. 3" in smartphones.

But that is far from No. 1 in this arena. Microsoft's software ran on 3.7 percent of the smartphones shipped during the second quarter, compared with 13.2 percent for Apple and 79.3 percent for Android, according to the International Data Corporation.

Microsoft has argued that the selection of apps available for its phones is improving all the time. There are still big developers that have not produced software for Windows Phone, such as Facebook's Instagram, but far fewer than there used to be. The company says there are more than 170,000 Windows Phone apps.

One unsettling possibility for Microsoft in mobile is what has occurred in the Internet search market, where the company's Bing search engine lags far behind the market leader, Google. Microsoft has conducted exhaustive research showing that Bing search results are equivalent to or better than those of Google. But the affinity for the Google brand is strong for the vast majority of people.

The question is whether a similar perception dooms Microsoft's mobile phones to the margins of the industry.

"They're making something arguably very well designed, but it doesn't matter," Evans, the analyst, said. "I think they're late.""The issue I wonder about is the amount of complexity Microsoft is taking on its business by absorbing Nokia at the same time it is reorganizing at the same time Windows 8 is faltering. It's scary from that standpoint."

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