Bala Iyer

My colleague Venkat and I recently wrote this piece for a class discussion.

The recent announcement by Nokia to use Windows Phone 7 as their preferred operating system has left many people wondering – WHAT WERE THEY THINKING? What does this choice mean for the mobile ecosystems?

As Mobile World Congress gets underway in Barcelona, the time is right to look at ecosystems in the mobile space.  The Nokia-Microsoft announcement brings into sharp focus some of the key challenges of (1) orchestrating and (2) participating in ecosystems.

In the mobile arena, as of now, there are two dominant ecosystems – iOS orchestrated by Apple and Android orchestrated by Google. The others seeking to be orchestrators are RIM with Blackberry, HP with WebOS and Microsoft with Windows  Phone 7. By announcing its link with Microsoft, Nokia abandoned its ambitions to be an orchestrator of the Symbian ecosystem.  In fact, they are now just a participant in an ecosystem by providing products and services. Other examples of such participants include handset manufacturers such as HTC, LG, Samsung, Motorola and SonyEricsson.  Many of these companies are steadily shifting away from either Symbian or Microsoft and embracing Android.  For a long time, Nokia--as one of the largest handset manufacturers--offered its handsets with Symbian software. Now, it has realigned with Microsoft to create a compelling third ecosystem (in the words of Steve Ballmer and Steven Elop).
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This decision is strategic not just for these two companies but will have far reaching implications for other participants in the ecosystems. In fact, this has the potential to impact  the shape of every mobile ecosystem.
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By preferentially linking to Nokia and paying billions of dollars for this arrangement, Microsoft is signaling that Nokia as a handset maker is more important than other handset makers such as HTC, LG, Samsung and others who may be examining their portfolio of devices across different mobile operating systems. Nokia, in contrast, has admitted that its vertically-integrated model of HW-SW (with Symbian at its core) has failed and retreated to become a device maker and preferential (but not exclusive) handset manufacturer of Windows Phone.  

Both parties have assumed huge risks by making this decision. The risk for Microsoft is that other hardware manufacturers may not synchronize their product development roadmap with Windows. The risk for Nokia is that its differentiation is limited by the features and functionality of Windows.  Competing in the brutally cost-competitive hardware market requires scale and Nokia faces an uphill battle.  The other option for Nokia is to compete in the high-end market and create innovative products that run on Windows Phone 7. Steven Elop had few attractive options. Google would not have entertained preferential position but Microsoft--given the poor initial showing with Windows phone--did. It even paid handsomely for the cooperation.  Ballmer and Elop are hoping that their combined scale will be adequate to be a third viable ecosystem.

What will happen as a result of this move? Will we see both Nokia and Windows Phone disappear next year? Probably not.  But, the odds are stacked against them becoming a viable  third ecosystem.

Ecosystems are vibrant when it has multiple participants who are neither tightly coupled (exclusive) or loosely coupled (totally uncommitted) but somewhere in the middle, providing the support to create complementary network effects.  Both Nokia and Microsoft--with this decision--have gone closer to the exclusive end. This risky position will only be rewarding if this ecosystem does indeed becomes the credible third alternative to Apple and Google.  This is a tall order with at least two other credible ecosystems orchestrated by HP and Research in Motion (RIM) vying for the same spot.  This move has consequences for Samsung, LG, HTC and SonyEricsson--which has announced its PlayStation Phone on the Android platform at MWC in Barcelona.  Android becomes more attractive to the independent handset makers against vertically integrated ecosystems orchestrated by Apple, HP and RIM.

As competition shifts from products-versus-products to ecosystems-versus-ecosystems, such decisions by key players not only impact the firms making the decisions but also other participants and orchestrators of competing ecosystems.

Do you think that Nokia and Microsoft will be successful in creating a third mobile ecosystem?