Nokia and Windows Phone 7

You've probably heard that Nokia has decided to use Windows Phone 7 as its primary operating system. I initially thought it was a bad idea, but I'm not so sure anymore.

Why Nokia's Move Is Confusing

Normally, companies try to differentiate their own products, while trying to commoditize the products of their suppliers (and products complementing their own products in general). Joel Spolsky writes:¹

All else being equal, demand for a product increases when the prices of its complements decrease.

This is why Apple wants iPhone apps to be as cheap as possible. Cheap iPhone apps are good for Apple's iPhone sales.

Let's look at an example closer to Nokia's situation. Cell phone manufacturers that don't own an operating system don't want their customers to know what OS they are using; they want the OS to be a commodity. This is why companies like Samsung and HTC put custom (and often completely atrocious) skins on their Android and Windows Mobile phones in the hope that this will hide the OS, and at the same time help them differentiate their phones from other manufacturers' phones that run the same OS.²

This is the same reason why HP bought webOS, and why they seem to be playing around with the idea of putting it on PCs. Today, HP is just another manufacturer of Windows PC and has to compete with Dell, Lenovo, and cheap store brand computers. If HP's computers were to run webOS, on the other hand, they would be different from computers running Windows, and as a result, HP might be able to get people to stop comparing their products to the products of other manufacturers purely on price.

This is also why Apple only owns a small percentage of the PC market, but a huge share of its profits: Macs don't have to compete with Windows PCs on price, because they're different from Windows PCs. Most people who want a Mac won't substitute it with a Windows PC just because it's cheaper.

So why would Nokia abandon development of its own operating system, and instead opt to use an operating system that forces them to compete with other manufacturers purely on price? Nokia is effectively commoditizing its own products.

What Nokia's Options Were

Having wasted the last three years, Nokia is in a bad place. There really weren't any good options. The bad options Nokia had were:

1. Try to fix Symbian. Hasn't worked so far, not likely to work in the future.
2. Go with MeeGo. It's not yet ready, so that's not really an option either.
3. Go with Android. The Android market is already almost entirely commoditized. Nokia doesn't want to and probably can't compete purely on price with companies like Motorola, Samsung, HTC, LG, Sony Ericsson, Dell, and Huawei.
4. Go with Windows Phone 7. Same problem as Android, but less severe.

Obviously, none of these options are good, but the last one seems to be the least horrible one. Nokia might do well selling Windows Phone 7 phones, at least for a little while, until too many other hardware manufacturers enter the market.

But it doesn't seem like a good long-term plan. If Windows Phone 7 does well, other manufacturers will enter the market to get a piece of the pie, and Nokia will be forced to cut its profit margins. (If Windows Phone 7 fails, well, that's even worse for Nokia.)

What Nokia Might Be Trying to Do

In the days after the announcement, Nokia CEO Stephen Elop said a bunch of interesting things. I want to point out two quotes in particular.

Slashgear writes:

"We’ll ask [the MeeGo team] to change their focus onto future devices, future platforms" Elop explained, and then take those lessons learned and transfer them to "future disruption in the mobile ecosystem."

And Engadget reports:

Elop told the crowd assembled there that Nokia's "first priority is beating Android."

It seems possible that switching to Windows Phone 7 is not Nokia's endgame, but merely a way of buying time. Given Nokia's options and what Elop has said about MeeGo and Android, I think it's plausible that Nokia's plan goes something like this:

1. Use Windows Phone 7 to get through the next few years, and help it prevent Android from gaining such a huge market share that it utterly dominates the market, preventing new operating systems from being launched successfully.³
2. Keep working on MeeGo and eventually switch from Windows Phone 7 to MeeGo (Elop's aforementioned "future disruption"), as the Windows Phone 7 market becomes unsustainable for a company like Nokia.

That way, Nokia can profit from the Windows Phone 7 market while it isn't entirely commoditized yet, but can switch back to its own operating system once it's ready.

Of course, this may just be wishful thinking on my part. Because I really think that the phone market could benefit from having another strong, independent hardware manufacturer that has complete control over its hardware as well as its software stack.