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Summary:

This morning, Nokia’s and Microsoft’s chiefs announced the two companies were entering into a “strategic partnership” that will see Windows Phone become the primary operating system for Nokia higher end handsets. The two companies are coming together to mix search, maps, content and app stores.

Stephen Elop and Steve Ballmer

Stephen Elop and Steve BallmerAs soon as Stephen Elop quit Microsoft to become Nokia’s first-ever chief executive from outside Finland, people were predicting that the two companies would start working together in some way. Over recent days, particularly in the light of Elop’s memo to staff at the mobile giant, that speculation has cranked up.

Well, it’s happened. Friday morning, Elop announced, along with Steve Ballmer, the news that the two companies were entering into a “strategic partnership” that will see Windows Phone become the primary operating system for Nokia higher-end handsets. In fact, it’s a more intimate link-up than almost anyone predicted, with the two companies coming together to mix search, maps, content and app stores.

But What Does It Really Mean?

Depending on where you start, and where you think the market is headed, it’s possible to see this match in two very different lights. Is it the world’s most powerful software company and the world’s biggest handset manufacturer joining forces? Or is it two lumbering giants with serious weaknesses linking arms to try to weather the storm together?

I suspect it’s both. Microsoft and Nokia are in their current predicaments — losing the highest end of the phone market to Google and Apple — precisely because they are so powerful in other areas of the market. Linking together makes a certain amount of sense at this stage, but whether they will succeed in patching up each others’ problems is not yet clear.

Certainly from either side, there’s sense in the deal.

It’s easy to understand where Elop’s drastic change of direction comes from. For Nokia, software has been a problem for a long time. In his memo, he outlined how slow MeeGo has been to market: just one device planned for this year. In fact, the software situation is much worse than that. MeeGo’s predecessor, the Maemo project — aimed at creating a next-generation operating system for Nokia — has been in the wild for six years and yet has only made it onto four devices ever.

And remember, you can’t say Elop doesn’t know the software business. He was the chief executive of Macromedia when Adobe bought it for $3.4 billion in 2005. On joining, he clearly realized that a year-long partnership with Intel has gone nowhere, leaving Nokia with only Symbian: a system that, despite its market penetration, is not up to the job.

Whatever problems Windows Phone 7 has (and critics say it has plenty) at least it’s out there. In the short term, it means Nokia can get some smartphone devices in the hands of customers. And, crucially, it should give Nokia a way into the lucrative U.S. market, where it has failed time and again to make an impact.

But in realistic terms, this certainly looks like a victory for Microsoft. It gets a huge hardware partner to work with, one with a vast user base and incredible reach into emerging markets. That means the disappointing numbers around Windows Phone should be erased with the flick of a switch; last week Microsoft was trying to crow about 2 million Windows Phone handsets; Nokia ships around half a billion phones each year.

In addition, Nokia’s prepared to let other troubled areas of its business — like its Ovi download store — get (more likely subsumed) into Microsoft’s brand.

What does Steve Ballmer really have to lose? Making this partnership work is certainly much cheaper and easier than a merger between the two companies. Perhaps the bullish Microsoft boss learned an important lesson from the botched attempt to buy Yahoo in 2008: Start by having somebody sympathetic at the top, and you can go a lot further a lot faster. Some are already suggesting this could be a prelude to an actual merger, if things work out, at some point in the future.

Beyond all this there is, obviously, still a bigger question.

Elop suggested that “together we have the opportunity to disrupt the current trajectory,” but can this truly help the two companies beat the iPhone’s mindshare or block Android’s advances?

That’s where things remain entirely uncertain.

While Ballmer and Elop were bullish during a briefing with media and analysts in London, the subtext in their comments admitted they are both jumping into the unknown. Elop admitted that Nokia had looked at partnering with Google and Android, but was concerned that it would simply become just another manufacturer. That problem doesn’t necessarily go away if it partners with Microsoft — not least because the relationship is not exclusive on Microsoft’s part — but they hope that together they’ll at least be competitive.

They also said that mobile networks were happy to see a strong third ecosystem that could compete with Android and iOS, and were looking forward to the future of the Microsoft-Nokia platform.

But that’s the problem: There’s hope, rather than evidence, to suggest that the two companies can defend each others’ weaknesses and play to each others’ strengths at the same time.

Faced with a potentially grim outlook, Elop decided to turn to Winston Churchill for inspiration since he was speaking in London: “Churchill said ‘a pessimist sees the difficulty in every opportunity, but an optimist sees the opportunity in every difficulty,” he told the assembled ranks. “I am an optimist.”

There’s a difference between an optimist and an insider. Anyone with no ties to either company would look at this partnership and see potential for danger. After all, you have one hardware business, Nokia, that has admitted that its recent problem has been in execution, and one software business, Microsoft, that has admitted that its recent problem has been in execution. Faced with aggressive, innovative opposition, their joint strategy makes sense — but it doesn’t necessarily route around their weaknesses because they’re still going to have to execute well to make it happen.

Perhaps there’s another famous Churchill quote that Elop and Ballmer might want to consider when they head off to celebrate the deal: “However beautiful the strategy, you should occasionally look at the results”.

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  1. The ecosystem war is at least more exciting as a result of this announcement. But consumers are still not going to see the most important change they needed from Nokia – a robust market of 3rd party applications.

    One must also wonder what this means for RIM which is now almost certainly not being bought by MSFT (perhaps it’s only hope) and for HP whose lackluster product introductions earlier in the week showed a product still behind competitors and not ready to ship for months…

    There clearly isn’t room for as many performers who wish to fill this stage but as with Bing, where market share growth had come at the expense of smaller players without much impact on Google, this new attempt by Microsoft in the phone space is likely to simply dash the hopes of other contenders without slowing Apple or Android.

  2. Time and the market will indeed decide but one this is clear. Inside Nokia there’s a pervasive new awareness to execute and be accountable, and that’s a great first step to acheiving the potential we see in this new ecosystem.

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  4. This is the beginning of the end for the two companies mobile ventures. The only successful way to make it work is if they merge. It is rare that an alliance like this can work. Further what motivation would other handset makers now have to adopt Windows Phone 7?

  5. I am an ardent user of 4 of Google’s product: Gmail, Google’s search, Picasa & Google earth & I appreciate Google’s open source concept which is also its strength. I am also a strong fan & user of Nokia’s hardware. Therefore, I would have prefered Nokia’s partnership with Google on Android for versatility. Microsoft does not support open source, so how can they survive Google’s advancement. Whatever the case, Nokia should make their phones carry both Windows OS and Android so that consumers decide their choice. Only then will Nokia retain its dominance. Thanks.

    1. During the briefing, Stephen Elop did address the Android question with relative openness: he said that Nokia talked with Google about the possibility of going in that direction, but that it didn’t have enough benefit to make it worthwhile. They don’t want to become commodity manufacturer and fear that’s exactly what would happen.

      Perhaps they got more love from Microsoft? Remember, the deal is for MS to do software, Nokia to do hardware and the two companies to work together on services. Google would almost certainly have wanted full control over the service side of things.

      1. I am curious… if the concern for going with android is afraid of becoming commodity manufacturer, then how can hooking up with Microsoft not get them in the same position?

        unless, there is an “exclusive” deal going on between MS & Nokia.. So no more HTC windows 7 phones?

  6. This is good to everyone. The saying “the bigger they are the harder they fall” – applies here very well in my opinion.
    They will either do ok/well and then customers win. I doubt it though.
    Or they fail and Nokia will disappear as we know it today and MS will finally quit on its mobile attempts. Probably also one of the 2 or 3 things that can show Balmer the way out.

  7. Slapping a Windows logo on it and reporting a huge increase in the number of units shipped will probably satisfy their respective investors, but it doesn’t solve any of the underlying dysfunctions that got Microsoft and Nokia to where they are now.

    Given their challenges, I think this was a far better move for Microsoft than it was for Nokia.

    1. It certainly looks like there’s not a lot of downside for Microsoft, Jack. The markets might be a little jittery to begin with, especially Nokia’s investors. I’d expect them to settle down and be fairly pleased with this in the shortish term and then react badly if it doesn’t have major impact fairly soon.

  8. I for one think that this alliance will benefit both parties and most of all it will be good for the mobile web

    http://zonear.com/2011/02/the-new-partnership-between-nokia-and-microsoft-will-benefit-the-mobile-web/

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