Microsoft’s new CEO, Satya Nadella, and the big Nokia challenge: Control Shift

A week can be a long time in technology. And, in the space of less than seven days, we’ve seen two news stories that will have profound implications for the industry going forward.

First, Google sold its troubled smartphone subsidiary, Motorola Mobility, to Lenovo for $2.91 billion – significantly less than the $US12.5 billion it originally paid for it for in 2011.

Secondly, after a lot of speculation, Microsoft appointed Bing king Satya Nadella as its new chief executive, with Bill Gates standing aside as chairman to take a more hands-on role.

However, lurking under the surface of these two stories, there’s a common dilemma: How can an operating system vendor successfully manufacture its own hardware, without upsetting its external hardware partners?

Google sells Motorola

In 2011, Google – a company best known for online services, software and operating systems – decided to buy a mobile phone manufacturer, named Motorola. It eventually ended up selling that same company for nearly $US10 billion less than it originally paid.

Some analysts, such as Nicolas Charbonnier, argue the loss wasn’t as bad as it first appears. Charbonnier says you should subtract the cash ($US3.2 billion) and deferred tax assets ($US2.4 billion) Motorola had in 2011, as well as the $US2.35 billion Google sold Motorola’s set-top-box business for in 2012 from the original purchase price.

According to such an argument, even when you add around $US1 billion operating losses back in, owning Motorola cost Google somewhere in the ballpark of just $US3 billion. In exchange, the search giant gained a lot of valuable patents and staff expertise in the process – not such a bad deal.

Of course, even if you accept this argument, the fact remains that under Google’s watch, Motorola continued to deliver weak growth while bleeding money.

For a company that doesn’t license its operating system to other hardware manufacturers, such as Apple, it is logical to tightly integrate the development of both its hardware and software.

However, owning Motorola put Google in an awkward position where it was competing head-to-head against its own Android hardware partners.

To placate its partners (including Samsung, HTC, LG, Sony and others), Google decided to maintain a strong “firewall” between its Motorola and Android divisions. Otherwise, the risk is that some of its partners would have walked away from Android.

As a result, instead of co-developing new Motorola smartphones alongside new versions of Android (as Apple does with the iPhone), the firewall meant its new devices (such as the Moto G and Moto X) shipped with outdated versions of Android. This lack of integration, while placating its hardware partners, adversely impacted sales and growth.

It’s a dilemma another high-profile tech company is about to face.

Microsoft buys Nokia

In 2013, Microsoft – a company best known for online services, software and operating systems – decided to buy a mobile phone manufacturer, named Nokia. Does this situation sound familiar?

One of the first critical decisions Nadella faces is whether to erect a strong firewall between Nokia and the rest of Microsoft – as Google had with Motorola – or whether to integrate the two sides of its business, like Apple.

As I discussed in a previous column, the challenge is compounded by two other challenges Nadella faces:

Almost as soon as [the new CEO] accepts their new job, they will oversee two make-or-break challenges that will shape the company’s destiny.

The first will be overseeing the creation of the next major version of Windows, dubbed Windows 9. Microsoft cannot afford this product to flounder or draw the type of consumer criticism Windows 8 and 8.1 have.

The second, and far more difficult challenge, will be placating the increasingly edgy PC makers. The Android PCs are a potent symbol of this deteriorating relationship and willingness to abandon Windows when they’re presented with a viable alternative.

The question is whether Microsoft will put in place a “firewall” – as Google did with Motorola – or attempt to integrate like Apple. It’s a decision being made at the very moment PC makers are getting restless. The largest one – Lenovo – is now also an Android smartphone maker.

How Nadella handles this challenge – how tightly Nokia is integrated with the rest of Microsoft – will be one of the most important decisions the incoming CEO will make.

The dilemma is also a reminder of the risks businesses can face when they expand beyond their competencies.