Tuesday, September 3, 2013

Microsoft Nokia Merger

Microsoft is buying Nokia's smartphone business. Evidently, vertical relations between smartphone software developers and smartphone hardware makers can get strained. RIM has always held the Blackberry OS close to its chest. Apple enters the consumer market as vertically integrated and, tellingly, has not licensed other makers to use its software. Google took the opposite tack by licencing Android to all comers. Only later does it decide to purchase Motorola's smartphone business to better integrate hardware and software capabilities. Microsoft is the late comer to the smartphone operating system business and has had less success lining up phone producers. The deal insures that a major phone maker will be supporting the Microsoft OS for some time to come.

These deals likely solve incentive conflicts between vertically related firms. Some phone makers may free-ride off of others' being on the cutting edge ("bleeding edge") of new features. Since the software and hardware are complementary, there is likely to be a double-marginalization issue. Finally, there is a fair amount of coordination that must occur for promotional activities.