Microsoft-Nokia: A dog of a deal born from weakness

As I was pondering the Microsoft-Nokia partnership I was hit with some inspiration from the movie Hotel for Dogs, a favorite of the kiddiepoos.

Remember the scene where the dogs were running in the street? Nokia and Microsoft were the big ones that were struggling to keep up. A few blocks ago they led, but now more nimble players---notably Research in Motion and Apple---are in front of the pack.

Simply put, Nokia and Microsoft are the equivalent of two St. Bernards that are forced to run in 90 degree heat and high humidity. They're big. They're winded. And they could knock you over---if they could only catch you.

The turn of events is notable. After all, Nokia and Microsoft used to be in front of the pack. Nokia arguably still is---but isn't likely to hold the lead for long.

According to Gartner:

• Nokia had 45 percent market share in smartphones in the second quarter, down from 47.4 percent a year ago.
• Research in Motion had 18.7 percent of the smartphone market in the second quarter, up from 17.3 percent a year ago. Apple had 13.3 percent of the smartphone market, up from 2.8 percent a year ago.
• Microsoft's Windows Mobile represents 9 percent of the smartphone operating systems out there, with Nokia's Symbian at 51 percent, down from 57 percent a year ago.

If you add those figures up and stir you can almost hear this eureka moment coming from the headquarters of Nokia and Microsoft:

Microsoft: "Windows Mobile is an also-ran, but we've got to get Mobile Office, which needs work, on handsets somehow."

Nokia: "I'm getting whacked in the enterprise. Damn RIM."

Microsoft and Nokia: "Let's combine forces!"

The rub. There's not a lot of meat on this Microsoft-Nokia partnership. Mary Jo Foley reports:

The only product to which there’s a timetable commitment from the pair is Office Communicator for Mobile. Microsoft and Nokia said that will be on Nokia E Series phones some time in 2010. When I asked Microsoft and Nokia officials for details about how they plan to get Office Mobile and System Center Device Manager on the Symbian operating system, officials had no information to share. It sounded like the two have a roadmap but nothing more at this point.

It's no wonder that analysts were less than enthusiastic about this Microsoft-Nokia partnership. Goldman Sachs was the grumpiest of the lot.

Goldman Sachs analyst Sarah Friar writes in a research note:

In our view, the (Microsoft-Nokia) announcement speaks more to the weakness of the partners in the mobile arena, rather than reflecting a move from a position of strength. While we see innovation returning across the board at Microsoft, Windows Mobile remains the weakest link in the portfolio, and hence we believe that (the) announcement is more of a show-me story than an indication of a major trajectory change.

On Nokia Friar notes:

We view this announcement as a small positive, but think it is unlikely to change Nokia’s smartphone positioning in a meaningful way.

Friar's colleague across the pond was less charitable. Goldman Sachs analyst Tim Boddy writes:

We now believe that the benefits of an end-demand recovery will be offset by market share loss, while Nokia is unlikely to refresh its high-end product range in a meaningful way before mid-2010, leaving few near-term catalysts. Looking into 2H2010 and beyond, rising competitive threats from a new generation of much more formidable competitors, combined with Nokia’s weak recent track-record in developing software/solutions, mean that visibility on a recovery is low.

Simply put, Nokia and Microsoft are now the passive dogs in the smartphone market. They may never be leaders of the pack again.