Windows Phone, Nokia Dominance Projections May Be Overblown

Microsoft and Nokia's recent Windows Phone deal will allow them to dominate the market within a few years, according to some analysts. But there are hurdles.

A small but well-publicized set of research notes has predicted that Windows Phone will come to dominate the smartphone market in coming years, fighting Google Android to a standstill and forcing Apple's iOS onto a long, slow decline.

One such note, from Pyramid Research, features Windows Phone scratching out a narrow lead in the global smartphone market within the next two years.

"We believe that Nokia and Microsoft are a very powerful tandem, and that will show in its full force by 2013," Stela Bokun, senior analyst with Pyramid Research, wrote in a May 9 missive. "Lower price of the devices will be the crucial prerequisite for the expansion of WP models. Nokia knows it and Microsoft knows it, and I am sure they will act on it quickly."

Nokia is "big enough and strong enough to take on a couple of painful hits and come out of the struggle stronger than ever," she added. "Don't forget that while being late to the party is rude, everybody gets to see you enter the room. When Nokia -enters the room' with new WP-based devices, there will likely be much traction about its new -clothes and shoes,' which will be a good jump start for the new era of WP devices."

Bokun's model features a slowing in Android's growth, with Apple's iOS and Research In Motion's BlackBerry franchises suffering the collateral damage of Google duking it out with Microsoft. "While RIM and Apple are powerful players in the smartphone market, their desire to limit their mobile operating systems to their own hardware has antagonized large manufacturers, such as Samsung, LG and Nokia," she wrote, "who have the capacity to enjoy the benefits of economies of scale and whose devices account for an overwhelming portion of the smartphone market."

Meanwhile, research firm IDC suggested in March that Windows Phone will surpass both BlackBerry and iOS to become the second-ranked smartphone operating system in the world by 2015, largely thanks to that Nokia partnership. IDC's research note pegged Android's share of the market in 2015 at 45.4 percent, followed by Windows Phone with 20.9 percent, Apple's iOS with 15.3 percent, RIM's BlackBerry with 13.7 percent and Symbian with 0.2 percent.

Should any of these predictions come to pass, it would represent a substantial reversal from Microsoft's current fortunes in the smartphone space. In a May 6 research note, comScore suggested that Microsoft's percentage of the U.S. smartphone market dipped from 8.4 percent to 7.5 percent between December 2010 and March-good for fourth place behind Google, RIM and Apple. At the same time, new data from The Nielsen Company suggests that 6 percent of consumers indicated they wanted a Windows Mobile/Windows Phone smartphone as their next device, compared with 31 percent for Android, 30 percent for Apple's iOS and 11 percent for BlackBerry.

For the situation to reverse, and for Microsoft to gain such enormous benefits from the Nokia deal, certain things need to happen.

First, Microsoft and Nokia need to actually produce lower-cost phones.

At the moment, Windows Phone is calibrated as a higher-end smartphone with stringent minimum hardware requirements. Nokia wants and needs a low-cost alternative to its Symbian ecosystem, but to replace it with Windows Phone would require the Microsoft platform essentially alter its most fundamental DNA-and that will necessarily take time, effort and more than a few mistakes along the way. Considering that hurdle, and how Nokia-Windows phones even aren't expected to launch until 2012, it would be remarkable if the companies managed to design a low-end phone line capable of total market saturation by 2013-especially in the face of severe headwinds from Android, iOS and every other smartphone maker on the planet.

Not to mention, Microsoft and Nokia need to actually execute their partnership.

Even Nokia acknowledged the potential risks of its Microsoft partnership in its publicly released Form 20-F 2010 report: "If we fail to finalize our partnership with Microsoft, or the benefits of that partnership do not materialize as expected, we will have limited our options and more competitive alternatives may not be available to us in a timely manner, if at all," reads one section. "Our expected transition to the Windows Phone platform may prove to be too long to compete in the smartphone market longer term."

Well, Nokia and Microsoft signed the agreement. That leaves everything else to be done.

Nokia won't help Microsoft in the U.S. smartphone market.

Nokia can bring global scale to Windows Phone. But it's a radically different story in the United States. According to comScore, Nokia fails to place in the top-five rankings of either OEMs or smartphone platforms. In the OEM scenario, that ranks it behind Samsung, LG, Motorola and others. In platforms, it lags even Palm. Despite some possible benefits from the Nokia deal in international markets, Microsoft will likely have to continue to fight on its own for U.S. market share.

There's no guarantee of carryover.

One reason behind analyst optimism for the Nokia-Microsoft deal is the assumption that Symbian's market share will port to that of Windows Phone with little to no attrition-or, at least, no attrition that can't be subsequently made up. However, Symbian is already struggling to keep its position among burgeoning competitors like Android, and no hard data can predict whether its current user base will stick around in large numbers for Windows Phone.

In other words, the Nokia-Microsoft partnership might guarantee some additional market share for Windows Phone, and may even allow it to emerge as a massive force within the smartphone arena. But fast dominance of the space is by no means guaranteed.