Why Microsoft won't buy hardware to compete with Googorola

Chances are Microsoft will not retaliate against Google's 12.5 billion purchase of Motorola by acquiring a phone maker of its own, say industry analysts, mainly because of the company's rich history developing and licensing software and building an ecosystem of hardware partners.

Their thinking is that this approach worked with PCs, and that the overarching software license/hardware partner strategy will not change for smartphones.

"Microsoft is best served doing what it does well, which is software," says veteran tech analyst Roger Kay. "Acquiring a hardware company can provide great integration and an element of control, and Apple has excelled at this, but with Microsoft it could be a big distraction from its main business."

Microsoft does not have a good history with mobile hardware purchases. Its $500 million acquisition of Danger Inc. in 2008 -- Danger was the maker of T-Mobile's Sidekick phones -- resulted in the very short-lived social media-centered Kin phones, which were killed after a mere six weeks on the market.

When Microsoft tried to develop its own hardware, as with the Zune media players, success had eluded the company as well. However, you could call Zune players a noble failure and a victim of Apple iPod dominance in the MP3 player space, not necessarily a condemnation of Microsoft's product design or development.

Nevertheless, being a hardware vendor is outside of Microsoft's skill set, says Kay, and is a risky business in general.

"There is a lot to hardware," he says. "Lots of invested capital in inventory and supply chains and profit margins that aren't so great. Apple has made it work, but not many others have."

Google, which has no experience running a hardware unit, is heading down that road with the Motorola purchase and the results are to be determined, says Kay.

The analysts interviewed for this story agree that Google's purchase of Motorola was largely driven by the need to secure Motorola's 17,000 patents. This, they say, will give Google ammunition in its legal battle with Microsoft and others over Novell and Nortel patents, but the acquisition also has the potential to throw Google's Android OEM ecosystem out of whack. A possible negative side effect is that Google's stable of Android OEMs will be resentful of Motorola and the preferential treatment it will inevitably receive from its new owner.

Google has been careful not to disturb the OEM apple cart and in a company blog post Google CEO Larry Page promised to keep Motorola as an independent business.

"This acquisition will not change our commitment to run Android as an open platform," writes Page. "Motorola will remain a licensee of Android and Android will remain open. We will run Motorola as a separate business. Many hardware partners have contributed to Android's success and we look forward to continuing to work with all of them to deliver outstanding user experiences."

But inevitably non-Motorola OEMs will be concerned about how level the Android playing field is, and that could spill over into customer confusion and dissatisfaction -- an advantage for Microsoft, says veteran analyst Rob Enderle.

"I expect Microsoft to double down on their Windows Phone 7 licensing with remaining OEMs and use the concerns raised by the Motorola deal to get OEMs to license Microsofts platform instead," says Enderle.

Any infighting among Android OEMS will only help Microsoft as the struggling Windows Phone 7 (a lowly 5.8 percent market share in the U.S.) will become more appealing to OEMs if they get fed up with Google's Motorola favoritism. Such infighting could also discourage Microsoft from alienating other much-needed phone makers by buying one of its own.

Microsoft's partnership with Nokia -- where the Finnish phone maker will license Windows Phone 7 on all its hardware -- gives Microsoft all the benefits of an acquisition without the costs and risks of integrating an entire company. This is the strategy Microsoft is likely to keep pursuing in the wake of Googorola, says IDC analyst Al Hilwa.

"It is clear that Google's acquisition of Motorola is first and foremost about patents and the company had to do a careful dance with OEMs by promising to keep Motorola as a separate subsidiary," Hilwa says.

"This in particular is likely to drive Microsoft away from purchasing a hardware maker. More likely Microsoft will forge some tighter deals with one or two more OEMs similar to the Nokia deal."

Shane O'Neill covers Microsoft, Windows, Operating Systems, Productivity Apps and Online Services for CIO.com. Follow Shane on Twitter @smoneill. Follow everything from CIO.com on Twitter @CIOonline and on Facebook. Email Shane at soneill@cio.com

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Tags business managementMicrosoftsmartphonesMergers and acquisitionsMotorolaGoogleconsumer electronics

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Shane O'Neill

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