Microsoft still hasn't solved its Windows Phone app dilemma

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Jason

Microsoft (NASDAQ:MSFT) is taking control of its mobile future, announcing a blockbuster $7.2 billion agreement to purchase Nokia's (NYSE:NOK) phones business and a license to its patents and mapping software. Per terms of the deal, Microsoft will absorb roughly a third of Nokia's 88,000 employees and much of its Lumia smartphone and Asha feature phone business. Nokia adopted Microsoft's Windows Phone mobile operating system as its primary smartphone platform in early 2011 and sales of its Lumia devices accounted for 80 percent of Windows Phone 8 handset sales worldwide during the second quarter of 2013, according to research firm Gartner.

Acquiring Nokia promises to give Microsoft the flexibility to accelerate the development of Windows Phone-powered devices, allowing the company to compete more effectively against Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG), which in 2011 acquired Motorola's mobile phone business for around $12.5 billion. Microsoft also will follow Google's lead and continue licensing the Windows Phone OS to other manufacturers.

That's assuming other OEMs have any interest in building future Windows Phone devices, which seems highly unlikely given their diminishing interest in the platform even prior to the Nokia acquisition. Samsung Electronics, the world's largest Android device manufacturer, offers a handful of Windows Phone units but has already stated its intent to create a host of connected devices based on the open-source Tizen operating system, calling its continued commitment to the Microsoft OS into question. Last month, DigiTimes reported that HTC is "likely to drift away from Windows Phone" in favor of going all in on Android, with industry sources saying that HTC is already re-thinking its Windows Phone strategy and shifting more of its attention to its Android efforts. Insiders also told The Wall Street Journal that HTC is developing a custom mobile OS targeting the massive Chinese consumer market, although it's unclear whether it will be entirely proprietary or will instead leverage a user interface built on top of Android.

It seems unthinkable that any rival manufacturer will make a serious Windows Phone commitment moving forward. Sure, vendors stuck with Android after Google purchased Motorola Mobility, but Motorola controlled only a small segment of the market at the time of the deal. Microsoft buying Nokia is akin to Google acquiring Samsung--it consolidates all the power under one corporate umbrella. Like it or not, Android is also too big to ignore, currently accounting for 75.3 percent of the worldwide smartphone market according to research firm IDC. Windows Phone makes up just 3.9 percent of the global market and is expected to climb to only 10.2 percent by 2017. (In a conference call Tuesday, Microsoft said it anticipates Windows Phone will represent 15 percent of the global smartphone market in 2018, generating estimated annual revenues of $45 billion.)

Even more problematic, Microsoft isn't just pushing away other Windows Phone vendors--the Nokia deal is doing nothing to pull in app developers, at least in the short term. Developers have expressed little enthusiasm for Windows Phone, and unless Microsoft dramatically boosts device sales, that isn't changing anytime soon.

"We simply can't devote any resources to support the platform. It's too small," Patrick Geuder, head of business development for videogame maker Minecraft, told The Wall Street Journal. Its Minecraft: Pocket Edition is available for iOS and Android, however, and while it's impossible to gauge when Minecraft or any studio will deem Windows Phone large enough to support, most developers can't afford to commit to more than one or two platforms--given that no one (not even Microsoft) forecasts Windows Phone eclipsing Android or iOS anytime soon, don't look for a dramatic increase in Windows Phone Store app submissions. And without a healthy inventory of apps, don't look for a dramatic increase in Windows Phone device owners, either. Microsoft buying Nokia certainly remakes the mobile landscape, but the more things change, the more they stay the same. --Jason

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