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Are Nokia & Microsoft Hoping Two Wrongs Make a Right?

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Stephen Elop and Steve BallmerAs soon as Stephen Elop quit Microsoft (s msft) 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 (s nok) 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 (s aapl) — 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 (s adbe) bought it for $3.4 billion in 2005. On joining, he clearly realized that a year-long partnership with Intel has gone nowhere (s intc), 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 (s goog) 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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38 Responses to “Are Nokia & Microsoft Hoping Two Wrongs Make a Right?”

  1. Lisa Antony

    Good point guys but i feel that working on windows platform is much easier than working on Symbian.. Moreover with 150 million more devices, the scope of symbain platform isn’t dead yet… There’s still a long way to go… I don’t think it should be that difficult for developers to work on windows platform, it just needs a little bit of investment of time,,,
    watch Nokia Developers Weigh in on the Planned Nokia/Microsoft Partnership

  2. as per my experience,
    nokia may not have good,powerful,freedom,interesting symbian.

    but still there hardware quality viz camera is genuine and better and fast.

    the only other thing i hate in nokia is the uncommon sound and data connectors. here nokia need to improve with standard connectors or need to change the connectors of whole headphones,pc audio-data connectors, cuz we cant afford or carry two headphones,wires etc at the same time.

  3. Adrian Meli

    It is hard to imagine how this is a bad decision for Nokia vs. Symbian but the question will remain whether they should have gone with Android. Either way, it seems logical that they stop wasting money on their own subpar efforts so at least they can increase their cash flow and aligning themselves with Microsoft is not crazy. That said, Nokia has been in decline for years so it is hard to imagine that Nokia makes Windows Mobile a winner alone. Life is tough when you are competing against Apple and Google. – Adrian Meli

  4. I believe you guys are pessimists that see the difficulty in every opportunity…

    Nokia is a very capable hardware manufacturer whose software division has failed to keep with the times.
    I am glad the symbian guys went home early on Friday, they really shouldn’t come back on Monday. They failed to come out with any semblance of a polished product in the last 5 years.

    First off, Google fanboys should realize that the company is notorious for claiming innovation and then later abandoning the project. Google Wave, Buzz, Apps, Catalog, heck even Gmail has failed to keep up with the new Yahoo and Hotmail.
    On top of this, on the shareholder perspective, Google has yet to profit from any idea other than advertising, despite having so many numerous endeavors. The main reason for this is due to a foolish organizational behavior principle of letting people pick what they want to do 20% of the time. Frankly, the last 20% of product development is the most tedious and also most important, and that is what google developers tend to skip out on.

    On the Android front, the market is extremely fragmented (way to many handsets running way to many versions of Android) and the carriers power over software releases along with rehashes such as droid further confuse the average consumer. Even on the high end consumer side, I know friends that are reluctantly on their 3-4th Android device due to abandonment by the carriers.

    Apple has done well to target the core usage of a mobile user in a clean and efficient interface, the addition of the App marketplace sandbox and leveraging the cult of mac users and developers has proved successful. However, Apple continues to abuse its power, raping developers for 30% of their profits, and every itunes release further enhancing their terms of agreement as to how far they can reach in your wallet and hold you by the balls. To be honest, I can’t think that Apple users will care, they are conformists and Steve Jobs loves to abuse them. As many times as you find something unique in the iPhone, you can find something that you want to change, or customize and cannot. I know developers that hate dealing with the apple marketplace, and enjoy the freedom when shifting to android, but once again miss the structure of a well thought out system.

    Microsoft has proved time and time again that it is capable of becoming a hardened contender in different business areas and endeavors. Some of your comments echo those of the Xbox and it’s development platform.

    What Microsoft has more experience than either Apple or Google, is building a solid development platform. I dare say that any Microsoft created developer focused solution, from XNA, .Net, Silverlight, Azure, and the list continues is easier to begin developing for, and initially more extensive in it’s capabilities. Xbox, definitely proves the company is capable of innovation.

    The Windows Mobile endeavor, does take into consideration both Apple and Google’s foray into the mobile handset territory, just like Bing, they are building a platform that focuses on continuous improvement at a breakneck speed. The care on selecting and demanding hardware minimum specifications enhances the end user experience, the XNA development platform is compatible for Windows, Xbox and Phone which means that ~95 percent of the code is the same. If you guys took business 101, you would recognize this as huge efficiency and cost savings for developers. That, will continue to be a major selling point, as the number of handsets increases.

    If you guys haven’t checked out Zune yet, I would recommend it, you will see how Microsoft continues to focus on creating competitive and disruptive innovative economic models which both content producers and end users have great experiences in. Once on the Zune platform, buying a song almost seems “stupid”. I don’t know how the model works, but 50 cent seems more than OK with it.

    As for this merger, Nokia’s capability to produce great hardware, positive brand recognition will move handsets. Their experience, while not historically fruitful, will prove powerful now that they are backing a capable platform an can provide developers revenue sharing that is amenable.

    Remember that the G1 and G2 were failed products, and that Apple took a year+ to get copy and paste, and didn’t have any app marketplace when launching. Comparatively, Microsoft is ahead of the game on ability to take on those challenges.

    Lastly, the mobile industry is extremely cyclical, and users get new handsets ever 12-18 months. In turn, this means that companies have an opportunity every 12-18 months to make their product “the one”. We will see, but my bet is that both these companies take 2012 by storm.

  5. Nokia’s distribution channels won’t necessarily buy Microsoft more Windows Phone sales.

    There are plenty of Windows Phone 7 models on the market now. They are not selling well at all. Bringing in more handsets won’t change anything.

  6. boah…

    It’s like with every new technology that get bypassed by the good established companies… I don’t think this will work.

    Microsoft+nokia versus google AND apple…. no way…

    The last 2 are also competing against each other at a higher level. With creativity and new very cool products. But its a very productive fight, where both benefit… but not microsoft or nokia…

    thank you for the article


  7. A very big problem with both these companies is that neither of them is very good at innovation. They have been left far behind by other smaller companies both in terms of hardware, software, and also in terms of understanding the market trends. But their strength is in the numbers. Both Nokia and Microsoft have a large presence and this could work to their benefit. Having said that, no matter what stronghold they have over the market unless they really innovate they cannot beat the present crop of aggressive and modernistic companies.

  8. The Trolltech acquisition. The Navteq acquisition. The MeeGo project. The reduction of jobs. It is not a good day for those who bet on Nokia’s previous “open source” strategy. It will lose a lot of it’s branding and Microsoft will gain.

  9. very good article.

    I for one am very skeptical of the long term benefit for Nokia. In one single move MS has taken down the #1 smartphone manufacturer, but WP7 has no market as of yet and this does not mean it will either. However, if WP7 takes off on Nokia what happens when Windows 8 comes out?

    Win8 is being designed to run from phone to desktop and if MS is successful in taking over the mobile market then they will unify the OS markets and all hardware manufacturers will quickly jump to Win8, and that leaves Nokia back to being a non-differentiated hardware manufacturer.

    I don’t see much long term benefit for Nokia in this deal though, I do see a lot of short term potential benefit for Microsoft thus, I just don’t get this move by Nokia unless it was planned by MS all along–get Elop in there as CEO to subvert Nokia into helping MS.

  10. 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.

    • Bobbie Johnson

      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.

  11. 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.

  12. Sunday Odubu

    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.

    • Bobbie Johnson

      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.

      • 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?

  13. 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?

  14. JohnatNokia

    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.

  15. 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.