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Microsoft can kiss other Windows Phone vendors goodbye

The software giant says it will continue to license its operating system after it buys Nokia, but its other partners aren't likely to stick around long.

Microsoft CEO Steve Ballmer and Nokia CEO Stephen Elop at a event last year in New York. Sarah Tew/CNET
If companies like Samsung and HTC were hesitant to build Windows Phones before, they're likely now reconsidering it altogether.

Microsoft on Tuesday revealed plans to buy Nokia's device and services division for $7.2 billion. The company views the deal as its way to gain more traction in a smartphone market currently dominated by Apple and Samsung. It's also a way for Microsoft to become more Apple-like, controlling both hardware and software.

While the move could help Microsoft in mobile, it also could upset the software maker's other Windows Phone partners and push them away from the platform. Microsoft said it will continue to license the operating system to other vendors for the time being, but that could change in the future. If Microsoft wants to gain any real market share in mobile, it will have to ensure that its hardware and operating system work together seamlessly. That's easier to do if it doesn't have to worry about supporting other device makers such as Samsung, HTC, and Huawei.

"Yes, Microsoft for some time will continue to license Windows Phone to other [hardware makers], but those [companies] will largely abandon it," Ovum analyst Jan Dawson said. "Nobody else has had much success with Windows Phone, and there's not much incentive to carry on investing in it."

Samsung declined to comment. HTC said it is "assessing the situation" and that it has no comment at this time. Huawei didn't have an immediate comment.

Smartphone makers have faced a similar situation before. Google in mid-2011 launched a $12.5 billion bid for Motorola, raising worries that the merger would threaten the independence of Android. So far, that hasn't happened. Still, some vendors, such as Samsung, are exploring alternatives like the Tizen open source operating system.

The Google and Microsoft deals differ in a couple key ways, however. Google, for one, promised to operate Motorola independently and not play favorites. Motorola held only a small share of Android at the time of the deal. In Microsoft's case, it's clear that the company will integrate Nokia and do all it can to market its own devices. Nokia is the only Windows Phone vendor with any real market share to talk about.

Windows Phone has received praise from reviewers, but few people have actually purchased the devices. In the second quarter, only 3.7 percent of smartphones ran Microsoft's operating system, according to IDC. While Windows Phone's share has been rising, it's still much lower than the 79 percent held by Android and 13 percent controlled by iOS during the June quarter.

Nokia, meanwhile, has dominated the bulk of the platform's shipments. The Finnish company made a big bet on Windows Phone a couple years ago, shunning its own operating system and Android in favor of Microsoft's software. Since that time, the two companies have partnered closely, and Nokia soon emerged as the favored Windows Phone vendor. It sold 82 percent of all Windows Phones in the second quarter, according to IDC.

For other handset vendors, moving away from Microsoft won't hurt their positions in mobile. Most have focused their efforts on Android, largely because of the operating system's flexibility, popularity, and price tag (there are no licensing fees like with Windows Phone). With Microsoft's purchase of Nokia, they're likely to concentrate even more on Google's operating system.

For Microsoft, though, losing Windows Phone licensees is a risk it's willing to take. It faces a slowing PC market and has struggled in tablets, which makes smartphones all the more important. As it revealed during the acquisition announcement, it makes only about $10 for each phone that Nokia sells. Nokia, meanwhile, generates about $40 in gross margin from the sale of Windows Phones. That makes hardware look pretty attractive to Microsoft, even if it means eventually alienating its partners.

Updated with "no comments" from Samsung and HTC.