Nokia's survival rests with Microsoft, Windows Phone 7

Phil Goldstein

It's a new day in Espoo, Finland, although I don't think anyone at Nokia (NYSE:NOK) or Microsoft (NASDAQ:MSFT) really knows what the long-term ramifications of the Nokia/Microsoft alliance will mean. 

The two companies--former rivals--announced a wide-ranging mobile pact in which Nokia will adopt Microsoft's Windows Phone 7 as its primary smartphone platform, merge its Ovi services into Microsoft and give Microsoft a handset partner with unparalleled global reach.

There are multiple levels and angles in this alliance, not least of which is that this appears to have been Nokia's only option, and a clear admission that its strategy in smartphones to date has failed. Nokia CEO Stephen Elop, a former Microsoft executive, clearly could not stick with the status quo of relying solely on Symbian and MeeGo the way former Nokia CEO Olli-Pekka Kallasvuo did. If Nokia went with Google's (NASDAQ:GOOG) Android platform it would have become even more of a commodity handset maker than it will be with Microsoft. Microsoft was clearly the last, best choice.

Another way to view the partnership is that it finally signals the end of one mobile era, and the end of Nokia as the kind of dominant force in handsets and wireless it once was. Back in 2005, before the emergence of Apple and Google, the great battle in mobile was between Windows Mobile and Symbian, and the mobile industry was afraid that Microsoft would make phone hardware a commodity as it did in the PC industry. Since then, both companies have missed their opportunities to ride the wave of innovation the way Apple and Google have, and both have suffered because of it. This pact represents their attempt to reverse those trends, though I think that given all of the challenges facing the two companies, the road back will be akin to climbing Mount Everest with only one boot and not enough supplies. 

On paper, the partnership seems to make perfect sense. Nokia can bring its global supply chain to bear, and in return gets a flashy new operating system to use that has received a lot of praise. Microsoft effectively eliminates Symbian and MeeGo as competition, consolidates and removes confusion in the market and gets a gifted hardware partner that is committed to the partnership like no other licensee, since Nokia is hinging its future on Windows Phone.

Will the Nokia Microsoft partnership be successful?However, there are a lot more questions than answers at this point, and the questions reveal troubling gaps in the overall strategy. First, Elop has talked a lot recently about the need to bring more of a focus to the U.S. market. However, Nokia has been saying this for years, and never did much about it. What will be different now? Elop promised to name a new North American chief in the coming days. Who will it be? Whoever it is, they will need to have strong relationships with U.S. carriers if this turnaround is going to work.

Right now, certainly at Verizon Wireless (NYSE:VZ) and AT&T Mobility (NYSE:T), the focus is on capitalizing on Apple's (NASDAQ:AAPL) iOS and Android. Sprint Nextel (NYSE:S) and T-Mobile USA are also focused primarily on Android, as are the Tier 2 carriers. The Tier 1 carriers will all likely have Windows Phone devices in their lineups by the middle of the year, but the platform is clearly playing second (or third) fiddle to smartphone ecosystems that have legions of developers, momentum and mindshare. That's a daunting landscape to confront for a company that has an infinitesimal smartphone footprint in the U.S. market (Nokia) and a company that had a 4.2 percent global smartphone market share, according to research firm Gartner (Microsoft).

"Windows Phone 7 has not totally taken the world by fire," Gartner analyst Michael Gartenberg told me. "Will a Nokia Windows Phone 7 device do any better than a Samsung or HTC?"

Moreover, when will devices start shipping? And at what price points? "It's not inconceivable that by the time this gets going, we're going to be talking about the thing that is going to unseat Android," CCS Insight analyst John Jackson told me. "The speed with which business models become obsolete is going to increase or at least come under material threat." Jackon said that Elop deserves much credit for taking a bold step--however, it's a "logical thing to do, but I think it is somewhat unimaginative."

Another complication is that Nokia and Microsoft have framed this deal as much more than a simple OS licensing. They are melding their mobile strategies together, though I think Microsoft is getting the far better end of the deal. As NPD Group analyst Ross Rubin noted to me, "Symbian offered tremendous flexibility in the user experience which allowed for differentiation. But it's difficult to see how Nokia will do that with Microsoft, especially without alienating other Microsoft licensees." How can Microsoft prize its relationship with Nokia without making HTC, LG and Samsung (or any other companies) feel like also-rans? And what will that do to Windows Phone's marketability and reach?

Yet another challenge is that sheer scale of the change this will require at Nokia, which also said it will have massive job cuts. "The implications for how sweeping an overhaul will be required in the Nokia's software strategy cannot be underestimated," ABI Research analyst Kevin Burden told me. "From an open environment to a closed environment--the services that Nokia has developed over the past few years will not be easily transferable. Nokia knows this--it's actually the reason it purchased the rest of Symbian a couple of years ago when it was clear that Android was going to be a huge threat."

All of this is a way of saying that Nokia and Microsoft have their work cut out for them. This is a fundamental shift in priorities for Nokia and a hugely complex software and services integration with Microsoft. Meanwhile, as research firm asymco astutely points out, history is littered with the remains of strategic mobile partnerships with Microsoft (Palm, anyone?). Additionally, what will the tablet strategy be for Nokia and Microsoft? As Strategy Analytics analyst Kevin Nolan put it: "Nokia has jumped from its burning platform into the life raft of Windows. In my view, both organizations must now paddle as fast as they possibly can if they are to reach the safety of the shoreline."

I wish the two companies the best. I also wish Nokia was not in such desperate straits that it had to make this shift. But it is. The move was a clear-eyed decision by Elop, and it was essentially his only choice. The important thing to remember is that does not mean it will necessarily work. --Phil