Microsoft-Nokia Pact: Logical, But Not Necessarily Appetizing

[qi:083] Updated: The deal expected to be announced between Nokia (s NOK)  and Microsoft (s MSFT) today, which would see Microsoft adapt its Office products for Nokia smartphones, would be is a desperate play. But not nearly desperate enough. The pact, by which Microsoft hopes to boost the fortunes of its Office software (threatened by Google, Linux and smaller companies like Zoho), and Nokia hopes to crank up sales of its smartphones (under siege from Research in Motion’s BlackBerry (s rimm) and the iPhone (s aapl)), is akin to taking two leftovers from your fridge, popping them on a plate and hoping people find the combination appetizing. Perhaps when the two companies hold their conference call today at 11 a.m. ET they’ll at least announce a special sauce to bring this whole mess together.

When it comes to the smartphone market, which is not only growing during the economic downturn, but is allowing Apple and RIM to walk away with 31 percent and 35 percent of the margins in the handset industry, respectively, Nokia needs to do something to protect its margins, if not its market share. Nokia sells a lot of phones, but most of them are cheap and carry low margins. So this deal with Microsoft, designed to appeal to the corporate customer, is clearly Nokia’s attempt to sell more high-end phones to enterprises.

But as partners go, Microsoft is an uninspired choice. The two firms already compete to put their two different operating systems on mobile phones — Microsoft has the increasingly less relevant Windows Mobile while Nokia is backing Symbian. And Microsoft’s Office software for mobiles is unlikely to give the BlackBerry a run for its money. After all, the email experience on a Windows Mobile phone isn’t terrible, but it’s not great, either.

As for Microsoft, its bet on Nokia isn’t much safer. Nokia retained its position as the top smartphone vendor in the world in the second quarter, according to global data out today from Gartner. But it’s seen its dominance erode over the last 12 months, to 45 percent market share from 47.4 percent.

So what we have is two behemoths that are feeling threatened by Apple, Google (S goog) and Research in Motion hoping that combining their two products makes them stronger competitors. Heck, maybe corporations will like that.


Microsoft Business Division President Stephen Elop and Nokia’s Executive Vice President for Devices Kai Öistämö talk about the deal here: