Nokia forges mobile alliance with Microsoft's Windows Phone 7

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Nokia (NYSE:NOK) CEO Stephen Elop announced a wide-ranging mobile alliance with Nokia's former rival--Microsoft (NASDAQ:MSFT)--that involves Nokia using Windows Phone 7 as its primary smartphone platform. The alliance represents a fundamental break from Nokia's past and culture, and is an admission that its smartphone strategy to date has largely failed. It also signals a decisive shift away from the Symbian platform, which has long been Nokia's mainstay smartphone operating system.

Click here to watch a portion of Nokia and Microsoft’s press conference.The announcement, unveiled in a much-anticipated investor conference in London, will create a pact between the world's largest handset maker and one of the world's largest software companies as they try to outduel Apple's (NASDAQ:AAPL) iOS and Google's (NASDAQ:GOOG) Android platforms. Yet many questions remain, analysts said, and neither party has much momentum in the mobile market.

The two companies did not disclose financial terms of the partnership. Nokia's shares dropped nearly 10 percent in the wake of the news.

As for Symbian, Nokia expects to sell 150 million more Symbian phones as it transitions to Windows Phone, but will decrease investment and focus on Symbian over the next few years. Nokia likely will phase Symbian out at some point in the future.

MeeGo's fate is a little less clear. Nokia said that MeeGo, the open-source project it developed with Intel, will become a long-term initiative focused on "next-generation devices, platforms and user experiences." Nokia said it will ship one MeeGo device in 2011--but didn't provide additional plans for the platform.

Nokia and Microsoft sought to cast the move as more strategic than Nokia simply licensing Windows Phone. For instance, Nokia's Ovi Maps will be integrated with Microsoft's Bing search engine and adCenter advertising platform; Bing will power Nokia's search services across its devices and services; and Nokia's Ovi Store and services will be melded with Microsoft Marketplace. "It's far more interesting than a simple licensing deal," Elop said.

Elop said Nokia will differentiate Windows Phone 7 but that it must "resist the temptation to customize just for the sake of customization."

In discussing why Nokia went with Windows Phone over Android, Elop said Nokia would be just one of many handset OEMs using Android. He also said Nokia couldn't leverage its services, like the mapping software it acquired from Navteq. "Our sense was differentiation could be a pretty big challenge," Elop said. "The risk for commoditization would increase dramatically."

As part of its change in smartphone strategy, Nokia also will shake up its organizational structure. As of April 1, Nokia will have two distinct business units: Smart Devices and Mobile Phones, which will focus on high-end devices and mass-market phones, respectively. Smart Devices will be led by Jo Harlow and will focus on the Windows Phone portfolio, MeeGo, Symbian and strategic business operations. The Mobile Phones unit will be led by Mary McDowell and will focus on connecting people to the mobile Internet in emerging markets. Most notably, Alberto Torres, the company's MeeGo chief, will leave the company. Nokia named Chris Weber, a 16-year Microsoft veteran, as its new U.S. president, replacing Mark Louison. Elop has talked multiple times in recent weeks about how the company needs to gain traction in the U.S. market. 

Elop also warned of major job cuts due to the reorganization. "We are not announcing how many and in what country," Elop said, but added that the company wants to move quickly on the cuts. Finland's economy minister said the government has had preliminary discussions with Nokia on the job cuts, according to a report in the newspaper Kauppalehti.

Nokia also said that from a financial perspective, both 2011 and 2012 will be transition years, but that after the transitions its Devices and Services net sales are expected to grow faster than the market and its operating margin is expected to be 10 percent or more.

Many questions remain about the new strategy. Nokia would not commit to when it will release its first Windows Phone device, but said the deal will allow it to move at a faster pace than it did with Symbian. Elop said that by 2012 Nokia will be shipping Windows Phone devices in large volumes at a variety of price points. Elop also said that its Qt development platform will continue to be used for Symbian and MeeGo, but will not be ported to Windows Phone.

On tablets, in which neither Nokia or Microsoft has a particularly strong strategy, Elop said Nokia is not announcing any tablet plans, but hinted that Windows Phone could possibly power a tablet.

Analysts were skeptical of Nokia's strategy, but admitted it was essentially the only option Nokia has. They also said it was a major win for Microsoft, which battled Nokia for years before the emergence of Apple and Google in the smartphone market. Gartner analyst Michael Gartenberg said it was also a loss for Google.

"Is this a case of two parties that are coming together because they see the value in each other's strengths, they can play off each other, and they have value they can bring to the table? If it's that, then something good can come out of it," Gartenberg told FierceWireless. "If it's 'The enemy of my enemy is my friend,' and we are going to come together because we have to, that usually doesn't work out well."

The main challenge for Nokia, Gartenberg said, is to differentiate its offerings in ways that other Windows Phone vendors like HTC, LG and Samsung cannot.

"There is no question that this partnership will provide scale for Microsoft, which has been struggling in the mobile world since the beginning, and will offer more competition, which will benefit operators (more options in terms of platforms)," Informa Telecoms & Media analyst David McQueen said. "However, this may not be the best move for Nokia and it is questionable how 'open' Microsoft will be to work with. Even if Nokia fears Google's dominance, an open platform like Android would allow much more possibilities to Nokia."

NPD Group analyst Ross Rubin also questioned how much flexibility Nokia will have with Windows Phone 7 modifications. He also said that there are still a number of questions about Nokia and Microsoft's tablet strategy.

"There is also the issue of moving into an era of multiple wireless access devices such as tablets," he told FierceWireless. "As Microsoft seems committed to keeping [Windows Phone 7] on the handset, Nokia would need to look elsewhere to support that kind of device. Microsoft clearly won't have anything that truly embraces the slate until the next version of Windows due in another year or two. That is, if Nokia sticks around that long. It could use Windows Phone 7 the same way Palm used Windows Mobile, as an interim quick fix until its own play (MeeGo) is ready for prime time."    

For more:
- see these three Nokia releases
- see this AllThingsD live blog
- see this Bloomberg article
- see this Dow Jones Newswires article (sub. req.)
- see this WSJ article (sub. req.)
- see this NYT article
- see this Reuters article
- see this BusinessInsider article

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