With Nokia deal, Microsoft aims to mimic Apple strategy

Microsoft’s $7.2-billion bid for the world’s second-largest cellphone business isn’t really about phones.

The acquisition of Nokia’s devices and services unit gives the software giant a crucial new chess piece as it seeks to reinvent itself to compete in a much bigger and more complex game against rivals Apple and Google.

In this new battlefield, the ultimate goal is to see who can produce the broadest range of gadgets, software and online services that all work seamlessly together in your house or business.

In Silicon Valley parlance, it has become a war of ecosystems. And in this fight, Microsoft is so far behind that it is pouring all its might and resources into an aggressive push to become No. 3.

“This is a battle for the hearts and minds of users,” said Charles Golvin, a Forrester Research analyst. “The real challenge Microsoft faces is how to bring all the things it does into one big, coherent whole.”

News of the deal came in a surprise announcement late Labor Day evening. It follows a summer of upheaval for Microsoft, which has seen a major reorganization and a $900-million write-down for unsold Surface tablet computers, capped by plans by Chief Executive Steve Ballmer to resign in the next 12 months.

Although the deal will need regulatory approvals, Microsoft says it is confident the acquisition will close in early 2014. Nokia’s shares soared 31.3% to $5.12 on Tuesday. Microsoft stock, meanwhile, fell $1.52, or 4.6%, to $31.88.

That Microsoft and Nokia should find themselves clinging to each other in the same lifeboat is an indication of just how dramatically the era of smartphones and cloud computing has turned their businesses upside down.

A decade ago, people camped out for new releases of Microsoft’s Windows operating system, which held a near-monopoly on the world’s computing market. Nokia, meanwhile, became the world’s leading cellphone maker, its handsets recognized for their sleek designs and signature, cascading ring tones.

The release of the iPhone in 2007, and the march into the post-PC era, has left both companies struggling to assert their relevance. Microsoft was slow to enter search and online services, while Nokia was late recognizing the importance of smartphones.

By acquiring the Finnish phone maker, Microsoft is trying to mimic the strategy practiced to near-perfection by Apple.

As Apple released blockbuster new products such as the iPhone and iPad, the company built a reputation for the ease and simplicity with which its devices worked together. That has created what the company calls a “halo effect” — a person who buys one Apple product is likely to buy more.

When he was a teenager, Eagle Rock resident Miguel Vargas recalls that he and his friends all had Nokia phones. Today, Vargas is a loyal Apple customer who owns an iPhone 5 and a MacBook Pro, and is planning on buying Apple TV.

“I’m entrenched in the Apple camp,” said Vargas, now 29. Microsoft is “too late to the game.”

In coming years, profits on sales of gadgets are expected to fall as it becomes harder to create distinctive devices. Technology companies see revenue opportunities in selling consumers movies, music and services such as maps, which is why the ecosystem is so crucial.

Microsoft must also face down Google, which has been strengthening its own Android ecosystem, acquiring Motorola Mobility to make phones and tablets. Google also makes its own Chromebooks and Chromecast to enhance TV viewing. The company’s strength remains search and online services such as Google Docs.

As that next shift takes hold, Microsoft is running hard to get back into the game.

On paper, Microsoft would seem to have all the tools it needs to match Apple and Google. The Redmond, Wash., company has its Bing search engine, the Office 365 suite of productivity tools, the Windows mobile and computer operating systems, the Xbox 360 gaming console and other tools such as Skype and Internet Explorer.

Yet unlike Apple and Google, Microsoft has never seemed to be able to knit them together in a way that conjures a memorable experience that wins over consumers.

On a conference call Tuesday with reporters and analysts, Microsoft chief Ballmer says he understands that.

“We’ve evolved our thinking,” Ballmer said. “We need to be a company that provides a family of devices … with integrated services that best empower people and businesses.”

Over the last year, Microsoft has revamped nearly every major product, including launching Windows 8, which was designed for touch-screen devices. It also created its own tablet, the poorly received Surface.

It’s all part of the mission to transform Microsoft into what Ballmer calls a “devices and services” company — a phrase notable for the absence of “software.”

Its history with Nokia illustrates the struggles and opportunities confronting Microsoft.

Two years ago, they struck a broad partnership to create phones based on Microsoft’s new mobile operating system. Ballmer believes that placing both companies under one roof will allow them to accelerate their makeover.

To help oversee the new strategy, Nokia CEO Stephen Elop plans to step down and join Microsoft as an executive vice president once the deal is complete. That has intensified speculation that Elop, a former Microsoft executive, is now a front-runner to succeed Ballmer.

“We’ve been going faster than Nokia has ever gone before,” Elop said on the conference call. “And as other manufacturers have fallen by the wayside or gone sideways, achieving our goal of becoming the third ecosystem is becoming very real.”

But third is a long way from being the world’s leading maker of cellphones, the position it occupied from 1998 to 2012. The company failed to embrace touch-screen smartphones fast enough. And when it finally did, its phones ran on its own operating system and failed to draw much interest.

Nokia’s cheaper feature phones remain popular in emerging markets. But seeking to jump-start its smartphone efforts, the company entered the partnership with Microsoft in 2011 to focus on phones that ran the Windows Phone operating system.

There have been signs of progress, though it’s been slower than both sides hoped. Windows Phone was the No. 3 smartphone operating system in the second quarter, with 8.7 million units shipped worldwide. That was up 78% from a year earlier — but still amounted to only a 3.7% market share, according to market research firm IDC.

Nokia was the top smartphone vendor by far for the Windows Phone operating system, shipping 7.1 million units in the second quarter, or 82% of all Windows Phones. That growth has been driven by Nokia’s Lumia phones, which have drawn generally strong reviews.

But the new Microsoft still faces plenty of doubts.

Michael Genovese, managing director and senior analyst at MKM Partners, said Microsoft probably would still trail far behind Apple and Samsung.

“Does this make consumers want Windows Phones?” he said. “I tend to doubt that, that this is really anything different, that anything from a consumer perspective will change.”

Jason Wong, a freelance graphic designer from Alhambra, owns an iPhone 4S, MacBook Pro, Apple TV and an iPad. Although he said he was “curious” about the Nokia deal and might take a look at the brand’s products, “to get me to switch my phone is tough.”

“To me, I’m pretty set with Apple,” the 34-year-old said.

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O’Brien reported from San Francisco and Chang reported from Los Angeles. Times staff writer Salvador Rodriguez contributed to this report.