Year in review 2011: Nokia forges alliance with Microsoft as Android dominates

The news: Nokia (NYSE:NOK) CEO Stephen Elop's first big burst of leadership came in February: After a months-long review of Nokia's business, which culminated in his infamous "burning platform" memo, Elop announced an alliance with Microsoft (NASDAQ:MSFT) to use Windows Phone and to tightly integrate the companies' mobile services.  

Nokia's deal with Microsoft includes a number of key elements, including the integration of Nokia's Ovi services, navigation and mapping capabilities into Windows Phone. Microsoft's Bing search engine also will power the search function on all of Nokia's devices, not just its Windows Phone gadgets. Additionally, the companies will engage in joint developer outreach and application sourcing, and will make Windows Phone developer registration free for all Nokia developers.

After months of work, the first results of the teaming were announced Oct. 26 at Nokia's annual Nokia World conference in London. Nokia unveiled the high-end Lumia 800 and the more mid-range Lumia 710, along with unique apps and services such as Nokia Drive and Music. The gadgets, along with Windows Phone in general are geared toward first-time smartphone buyers. Nokia subsequently released the devices in France, Germany, Italy, the Netherlands, Spain and the U.K., with support from at least 31 operators and retail partners.

As for Nokia's U.S. efforts, the company partnered with T-Mobile USA to launch the Lumia 710 in the United States, and hinted more devices would be coming in 2012. Nokia has acknowledged its position in the U.S. market is tenuous at best, and analysts generally agree that Nokia needs to produce far more than the Lumia 710 on the nation's No. 4 carrier to solidify its position in the American market. Indeed, Nokia's U.S. ambitions likely will get much clearer next month; the company has scheduled a press conference at the Consumer Electronics Show in Las Vegas in January.

Why it was significant: The stated goal of Nokia's partnership with Microsoft has always been to create a "third ecosystem" for smartphones after Apple's (NASDAQ:AAPL) iOS and Google's Android. And carriers appear ready and willing to coalesce around a third player, according to Verizon Communications (NYSE:VZ) CEO Lowell McAdam. (Research In Motion's (NASDAQ:RIMM) recent struggles clearly open a door for a third major player.)

Still, Microsoft and Nokia have several factors working against them. Even though there are now more than 30,000 apps for Windows Phone, selection is still dwarfed by iOS and Android. Further, consumers have not yet caught on to the platform, by Microsoft CEO Steve Ballmer's own admission. A lack of LTE support is also hindering both the platform and Nokia's hopes to break into the U.S. market, particularly with Verizon and AT&T (NYSE:T) Mobility. Additionally, Android continued its dominance of the market, with 43.4 percent of the global smartphone market in the second quarter and 52.5 percent in the third quarter, according to Gartner. While Nokia-Microsoft is a potential juggernaut, Android already is.     

Year in review 2011: Nokia forges alliance with Microsoft as Android dominates