Microsoft, Nokia, Verizon And Vodafone Take Bets On The Smartphone Market

smartphonesUnder two separate deals that took place this week, Microsoft, Nokia, Verizon and Vodafone took steps that speak to the companies’ expectations for the smartphone market and the telecom industry as a whole. Microsoft’s decision to acquire Nokia’s devices and services division could help it shore up its place in the smartphone ecosystem while Verizon and Vodafone parted ways to enhance their own products and services.

British telecom Vodafone agreed on Monday to sell its 45% stake in the wireless business that it jointly owned with Verizon Communications in a $130 billion deal. Vodafone’s decision to accept the deal, which Verizon had long sought, was largely due to timing, according to analysts.

Verizon and Vodafone created the wireless unit, Verizon Wireless, in 2000 as a joint venture between the two companies. And for several years, media reports and telecom experts had tracked Verizon’s attempts to buy its partner’s stake, which Vodafone routinely rejected.

“The timing was the big thing,” maintained John Delaney, an associate VP at IDC who specializes in the European mobile market. “Vodafone held onto its stake during a time when Verizon’s growth was important to the health of Vodafone. Verizon is still growing but with the smartphone market starting to peak and mature, Vodafone has every reason to suspect that Verizon’s revenue growth could lose steam over the coming years and coupled with a price that the company found acceptable, it probably decided to sell.”

A request for comment from Vodafone was not returned at the time of publication.

Several reports have pointed to a slowdown in the mobile phone market. Worldwide mobile phone sales (including feature and smartphones) slightly declined from roughly 1.8 million units in 2011 to 1.7 million units last year, according to Gartner. And while smartphone sales in Europe grew 12% in Q1 this year, it was the lowest growth rate in nine years, reported IDC. In addition, more than half of the cell phone users in the US now own a smartphone, suggesting further market saturation.

“It’s no surprise that Verizon and Vodafone made this deal,” agreed Greg Sterling, founding principal at Sterling Market Intelligence. “Wireless has become a strategic part of Verizon’s business and it gives Vodafone a ton of money to go and make its own acquisitions elsewhere.”

At a time when the demand for mobile phones is at risk of slowing down, gaining complete ownership of the wireless unit lets Verizon reap the unit’s full profits, which it can use to bolster its services and expand its wireless capabilities. “Verizon is very bullish about growth prospects in the U.S. wireless market – not just cell phones, but machine-to-machine services and wireless market opportunities in health care and energy and for cloud and security services,” wrote a company spokesperson in an email.

For Vodafone, in addition to being a windfall for its shareholders–the company has said it plans to return $84 billion to investors in cash and stock–the deal gives the British company a gigantic war chest for enhancing its products and services. Vodafone could also give a boost to the European telecommunications industry, which has been taking a hit from increasing international competition.

The Microsoft and Nokia deal is a different beast, but also speaks to shifts in the smartphone market. Microsoft will acquire the Finnish company’s device  and services business for approximately $7.2 billion in a move widely seen as Microsoft’s attempt to imitate Apple and Google’s strategy of owning the hardware, software and services components of their business.

The deal, which is expected to be completed in Q1 next year, will give Microsoft control of Nokia’s smartphone manufacturing and 32,000 Nokia employees, including its engineers.

The transaction is “logical,” according to Sterling. “80% of the Windows phone shipments come from Nokia and Microsoft wanted to protect its phone, especially with the possibility that Nokia might have put out an Android phone, which would have been very threatening to Microsoft,” he said.

Critics of the deal have pointed out that Microsoft risks alienating other manufacturers by making Nokia the prime Windows phone manufacturer. However, as Ted Schadler, VP analyst at Forrester Research, commented in a blog post, “the risk of not owning a phone is much greater than the risk of owning a phone and pushing other manufacturers away.”

In terms of its placement in the smartphone ecosystem, Charles Golvin, principal analyst at Forrester, placed Microsoft squarely behind Google and Apple, but noted that it faces numerous challenges in holding on to its spot. In addition to other potential players like Samsung and Amazon vying for its spot, a major problem for Microsoft “is while they have numerous assets with the Xbox, PCs, smartphones, online services, search and cloud storage, productivity tools, etc., all of these things are quite disparate,” Golvin observed. “That’s something Microsoft really has to work on if they’re going to pull all these pieces together in a way that benefits the customer.”

From an advertising perspective, saturation in the smartphone market suggests ad buyers can expect the market share of devices and mobile operating systems to be somewhat less volatile with time. In addition, as more consumers shift from feature phones to smartphones, the market share will mainly change according to replacement cycles and shifting brand loyalties.

Enjoying this content?

Sign up to be an AdExchanger Member today and get unlimited access to articles like this, plus proprietary data and research, conference discounts, on-demand access to event content, and more!

Join Today!