Microsoft Must Risk Billions, Develop a Phone to Beat Apple

Microsoft (NASDAQ: MSFT) is risking everything to bring its first tablet to market. But it might have to go one step further if it wants to compete against Apple (NASDAQ: AAPL).

On Monday, the Windows maker officially unveiled its first tablet, Surface. Rumored to carry a retail price of $700 to $800, Surface features a unique cover that doubles as a keyboard. Microsoft hopes to use the cover and other differentiating features to win over consumers who are interested in buying the next-generation iPad.

According to Nomura analyst Rick Sherlund, Microsoft does not plan to stop there. "Our industry sources tell us that Microsoft may be working with a contract manufacturer to develop their own handset for Windows Phone 8," said Sherlund, as quoted in Business Insider.

Business Insider writer Jay Yarow believes that Microsoft might develop its own phone because the company's biggest manufacturing partner, Nokia (NYSE: NOK), is "on the cusp of collapse."

"[Microsoft] doesn't charge much for Windows Phone licenses," Yarow added. "It could make more money selling phones like Apple."

There is a third benefit as well -- free publicity. When Nokia, Motorola, HTC, and Research in Motion (NASDAQ: RIMM) introduce a new device, they have to work hard to gain the attention of the media. But when Microsoft announced that it was holding a big event to unveil something new, the company gained an immeasurable amount of attention. Thus, it might be beneficial for Microsoft to ditch Nokia and develop its own cellular devices.

Several rumors have claimed that the Windows maker will acquire Nokia to address Yarow's concerns -- to build its own, Microsoft-branded phones and to save its primary manufacturing partner. But most experts disagree with this belief.

"If I were Microsoft, I'd be disappointed that I had to bail out Nokia," Mike Snyder, President of Sonoma Partners, told Benzinga last week. "[I'd be disappointed] that Nokia could not be successful [on its own]. It's not a good sign that they [may have] to bail them out."

"Microsoft itself is a struggling company," added Trip Chowdhry, the Managing Director of Equity Research at Global Equities Research. "You never grow yourself by buying a company which is on the downhill."

Meanwhile, Brett Golden, the president and co-founder of The Chart Lab and Chart Lab Pro, said that there is "zero chance" that Microsoft will acquire Nokia.

Thus, if Microsoft intends to build a better Windows Phone 8 device, the company might have to do it alone.

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