Spring 2012 is Microsoft‘s (NASDAQ:MSFT) big coming-out party in the smartphone industry. Its new flagship phones in a much-ballyhooed partnership with Nokia (NYSE:NOK) — the Lumia 800 and Lumia 710 — will release in the broader international market and the U.S. after their late 2011 debuts in India, Hong Kong and the U.K., among other territories.
It’s a make-or-break moment for both companies. For Nokia, the Lumia represents a chance for redemption, a stab at regaining relevance since the company’s share of the world mobile market has crumbled with the rise of smartphone technology. Meanwhile, Microsoft dropped a cool $1 billion in February 2011 to get Nokia to help establish Windows as a phone brand capable of competing with Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) Android-powered products.
Let’s not kid ourselves, though. We’ve heard this song and dance from Microsoft before. In fact, its was just in October 2010 that Microsoft was claiming Windows Phone 7 was set to take over where Google Android started as the go-to operating system for phone makers. The failure of Windows Phone 7 last year was what spurred Microsoft to make its deal with Nokia in the first place.
This time around might indeed be different — Lumia phones have been warmly receivedby critics and consumers alike — but if Microsoft really wants to be one of the big boys in mobile, it’s going to have to go further. If Windows Phone is going to earn for Microsoft in the way that its Office business does, it’s time for Microsoft to get into the manufacturing game. It can do it, but only by spending steady and spending big.
Here’s the game plan: First, Microsoft buys Nokia outright. It appeared in June that this was going to happen. Industry insider Eldar Murtazin said on Twitter that Microsoft was close to buying up the Finnish phone maker for $19 billion, giving Microsoft an instant and massive share of the global mobile phone market in one fell swoop.
That deal didn’t pan out, and eventually the Lumia was announced, but the logic of the purchase still holds. As All Things Digital‘s Ina Fried pointed out in a Thursday editorial, a purchase of Nokia would allow Microsoft to start making phones that are built around its Windows platform rather than building Windows for multiple handsets. Phones with fully integrated operating systems are good business: Just look at the iPhone. Integrating Nokia into Microsoft’s business would be difficult given the geographic distance between their corporate headquarters, but it might be worth it.
Microsoft then could seize even more of the mobile market by making a splash and acquiring Research in Motion (NASDAQ:RIMM), too. The beleaguered house of BlackBerry represents a chance for Microsoft to gain control of a trove of mobile technology patents for a song. RIM’s market cap has shriveled over recent months, sinking from $12 billion in September to $8.6 billion as of this writing. If Microsoft waits until 2013 to buy RIM (which it would have to after making such a steep investment in Nokia), and RIM’s decline continues apace, it could have a bargain on its hands.
Microsoft has nearly $56 billion in cash at the moment. Given the near-constant shareholder dissatisfaction with the company, it probably wouldn’t be wise to spend on these companies too quickly. It would, however, be the quickest way for Microsoft to make Windows a real mobile presence.
The company is no stranger to entering a technology segment it had no presence in previously. Microsoft was laughed at when it announced the original Xbox game console at the beginning of last decade. Today, the Xbox franchise has transformed the company’s Entertainment and Devices operating segment into an $8 billion-per-year business — a segment whose operating income grew 529% last year.
Can Microsoft compete with Apple in the mobile market? Maybe. But it’s got to spend big to find out.
As of this writing, Anthony John Agnello did not own a position in any of the stocks named here. Follow him on Twitter at�@ajohnagnello�and�become a fan of�InvestorPlace on Facebook.
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