Microsoft’s Nokia Deal Leaves Open Questions About Market Share And NFC

Microsoft Corp.’s $7.2 billion acquisition of Nokia Corp.’s handset business, announced late on Monday, brings to the Redmond, Wash.-based tech giant a pioneer in near-field communication technology and allows it to combine hardware with a mobile operating system in the manner of rivals Google Inc. and Apple Inc.

It remains unclear, however, whether the deal, which is expected to close early next year, will help Microsoft close a yawning market-share gap with those competitors or give it a firm foothold in the struggling market for NFC payments.

The deal calls for Microsoft to pay $5 billion for Nokia’s Devices & Services business, which includes both smart and feature phones. Microsoft will pay a further $2.18 billion to license a portfolio of so-called utility patents held by Nokia. Having divested the handset unit that made it famous, the Finnish company will concentrate on businesses having to do with network infrastructure, mapping software, and licensing.

Nokia has some 15 smart-phone models equipped for NFC and in 2009 was the first handset maker to introduce a phone, the 6216 classic, with an embedded NFC chipset linked via circuitry to the SIM card, a configuration favored by mobile networks. Its handset was also the phone of choice for some of the earliest U.S. NFC payments trials, including a seminal Visa-sponsored pilot in Atlanta in 2006.

Some observers say the deal for Nokia’s devices, many of which already run on Microsoft’s Windows Mobile operating system, could propel an NFC-enabled mobile wallet Microsoft launched in November as part of Windows Mobile 8, its latest smart-phone operating system. The product, simply called Wallet, is similar to Apple’s Passport in that it stores cards, coupons, and other documents.

But NFC, especially for payments, has struggled to find its footing in the U.S., with only the carrier-controlled Isis service pursuing the technology for its mobile wallet. Many observers had hoped the rollout of the Europay-MasterCard-Visa (EMV) standard in the U.S. would stimulate NFC by placing enabled terminals in merchant locations, but a recent federal court decision that overturned the Federal Reserve’s interpretation of the Durbin Amendment has cast uncertainty on EMV timetables. “The catalyst for [NFC] would be the EMV migration, but who knows when that will happen now?” says Nick Holland, a senior analyst at Javelin Strategy & Research, Pleasanton, Calif.

Contacted by Digital Transactions News, a Microsoft spokesperson on Tuesday refused to address NFC or add comments beyond those set out by the company in a press release and presentation for the press and analysts.

Potentially holding more promise for Microsoft is the combination of its mobile operating system with an established line of hardware products. This puts the company in the same league as Google, which owns both the Android OS and Motorola Mobility, and Apple, albeit with significantly less market share than those two companies. “To be a player, you need to integrate your [operating system] offering with an OEM [device maker],” notes Mary Monahan, research director at Javelin.

Microsoft’s OS commands a 3.1% share of U.S. mobile subscribers, according to the latest report from comScore Inc. That’s good for fourth place behind the struggling BlackBerry OS from Research in Motion and well behind the 52% and 39.9% shares claimed by Google and Apple, respectively. It’s also down from the 3.8% share Microsoft commanded a year ago.

Nokia, too, has been overshadowed by competitors in recent years and fails to rank with the likes of Apple, Samsung, HTC, Motorola, and LG, according to comScore U.S. market-share figures for device makers. “I respect Nokia for their hardware but they’re clearly struggling as a device maker,” says Holland.

Microsoft, however, is the leader in desktop OS, and it enjoys a formidable cash hoard it can apply to the combination with Nokia’s smart phones. “While they’re both struggling players, Microsoft brings a lot of cash to the table” and could re-invigorate Nokia, says Monahan.

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Nokia’s acclaimed Lumia smart-phone line sold 7.4 million units worldwide in the second quarter, according to Microsoft. Its other handsets racked up sales of 53.7 million units.

But developing NFC may have to be put on hold for awhile as the Microsoft-Nokia combination works on other priorities. “There’s other things they need to sort out, like getting some decent market share,” says Holland.