Microsoft, Nokia Agreement Signals New Smartphone Game

Microsoft and Nokia's agreement has analysts divided over its strengths and weaknesses. How will Windows Phone 7 on Nokia phones affect the U.S. market?

Microsoft and Nokia announced a wide-ranging partnership Feb. 11, which will include running Windows Phone 7 on Nokia smartphones, in a combined bid to blunt the competitive momentum of Google Android and the Apple iPhone.

"We have a formidable plan to ensure our collective leadership in the smartphone market and in the ecosystem that surrounds it," Nokia CEO Stephen Elop told a London press conference. "Our long-term strategic alliance will build a global ecosystem that creates opportunities beyond anything that currently exists."

Now comes the hard part: actually building that ecosystem.

Nokia apparently confirmed Feb. 13 that leaked concept images of a Windows Phone 7 device, floating around on sites such as Winrumors, are in fact genuine. Sleek, thin and offered in multiple colors, those smartphones' designs seem a direct response to high-end rivals such as the iPhone and Motorola's Droid franchise.

Nokia's agreement with Microsoft could help the latter penetrate international markets where the former retails a strong presence. But the net effect in the United States could be negligible; according to comScore's data for fourth-quarter 2010, Nokia came in dead last among top mobile OEMs, trailing the likes of Research In Motion and Motorola.

That may not help Microsoft in any substantial way as it seeks to build Windows Phone 7 into a true alternative to Google and Apple. At the end of January, Microsoft confirmed that some 2 million Windows Phone 7 units had been sold by manufacturers to retailers, but the number reaching consumers' hands remains unclear. In its recent research note, comScore suggested that Microsoft's share of the U.S. smartphone-platform market had fallen from 9.9 percent to 8.4 percent during the fourth quarter of 2010, and it could be several more quarters before the full impact of Windows Phone 7-released in the United States in November-can be clearly discerned.

Nonetheless, some analysts see the agreement as predominantly a win for Microsoft, giving the company another avenue for its devices.

"Microsoft wins big in this arrangement, having gained a partner for an OS that is struggling in the market and losing share even among its current device suppliers (e.g., HTC)," Jack Gold, principal analyst of J. Gold Associates, wrote in a Feb. 14 research note. "Nokia brings huge scale and can dramatically increase WP7 market share beyond its traditional reliance on vendors with much lower market share. And this precludes Microsoft from having to enter the device market directly (as it did with its Kin disaster)."

However, some analysts see the deal as a decidedly negative one for Nokia, particularly in the longer term.

"We think Nokia has created a new set of issues-a lack of ecosystem control, margin decline and a raft of new royalty payouts-in return for a 'unique relationship,'" Lee Simpson and Andrej Krneta, analysts with Jeffries & Co., wrote in a Feb. 14 research note. "With WP7 as Nokia's new primary smartphone OS, why would any operator take an end-of-life product (Symbian)? This can only cap the top line for Nokia going through 2011 and much of 2012."

The analysts believe that Nokia's first Windows Phone 7 devices will be "hollowed out 'N8s' or the like," referring to one of the manufacturer's higher-end smartphones. "Despite longer-term assertions of speedy time to market designs, the overhauling of road maps (and cancellations near-term) will likely dent near-term progress and leaving Nokia dangerously exposed to further market-share erosion."

The fate of developers who invested in Nokia's platforms, particularly Symbian, remains an open question. Nokia spokespeople have suggested the company is "committed to our developer relationships." Microsoft, of course, is publicly excited about allowing its developers access to what one executive describes as a "new ecosystem of possibilities."

Whatever the eventual outcome, it's clear that the agreement has fundamentally changed the mobile game for all companies in the space-and perhaps opened the door to both Microsoft and Nokia being able to compensate for past strategic missteps.

"The two companies are on their respective back feet," Andrew Brust, founder of Microsoft analysis and strategy provider Blue Badge Insights, told eWEEK soon after the deal was announced. "But they can certainly help each other: Microsoft gets global reach and market share from Nokia; Nokia upgrades from the somewhat stunted Symbian OS to something modern, touch-centric and contemporary in design value, through Microsoft's WP7."