Microsoft-Nokia deal is like two fading marathon runners deciding to hold hands

Microsoft and Nokia have joined forces in mobile in a move they are both counting on to get them back in the game. The deal raises some important and nefarious questions.
Written by Jason Hiner, Editor in Chief

My cynical side would compare the newly-announced Microsoft-Nokia mobile partnership to an Olympic track race in which two of the tired runners that are fading from the front decided to hold hands until they get across the finish line.

While Friday's announcement about Windows Phone 7 on Nokia hardware may not be quite that irrelevant,  it's also not the immediate game-changer that others would like you to believe. It's certainly doesn't transform the smartphone market into "a three horse race," as Nokia CEO Stephen Elop said on Friday. Nevertheless, there are a few interesting possibilities.

The partnership

Before we get ahead of ourselves, let's sum up what Elop and Microsoft CEO Steve Ballmer have actually agreed to:

  • Windows Phone 7 will become Nokia's primary smartphone platform
  • Nokia will contribute to Windows Phone 7 hardware development (help Microsoft developers better optimize their software for telecom)
  • Nokia will bring WP7 to "a larger range of price points, market segments and geographies" (translation: low-cost replacements for today's feature phones and more devices in the developing world)
  • The Microsoft Marketplace (app and media store) will absorb Nokia's current apps and content (the Ovi store)
  • Nokia phones will use Microsoft's Bing search engine, Zune music store, Xbox Live gaming center, and will jointly focus on future services to expand the capabilities of mobile devices
  • The deal is not exclusive; Microsoft will continue to have other hardware partners and Nokia will still make a few Symbian and Meego devices

Here is a 12-minute video clip of the comments made by Elop and Ballmer to kick off the deal:

Here are the concept designs for Nokia's first Windows Phone 7 devices:

The challenges and opportunities

Let me start by saying that Nokia is still one of the world's great mobile hardware makers. Its devices have fantastic screens and excellent cameras, plenty of high-end features, and terrific hardware design. I would argue that Nokia is consistently as good or better than HTC, Samsung, LG and Motorola and nearly in the same league as Apple, when it comes to producing attractive, durable, and well-designed hardware.

The problem with Nokia, as I've been saying for years, is that their software is no where near the high standard of their hardware. As smartphones transitioned into pocket computers in recent years, Nokia phones have fallen desperately behind in software. Elop confirmed that sentiment in his now-famous burning platform memo on February 8 in which he wrote, "The first iPhone shipped in 2007, and we still don't have a product that is close to their experience. Android came on the scene just over 2 years ago, and this week they took our leadership position in smartphone volumes."

Nokia needed a bold move in the software/OS/platform area in order to become a mobile leader again. Hitching up with Windows Phone 7, which just debuted last fall, is definitely bold. However, the move raises a hell of lot more questions than it answers.

Here are some of the challenges I see:

  • Why not Android? - Nokia has admitted that when it went shopping for platforms, it was courted by both Google and Microsoft. On the face of it, Google's Android would have made a lot more sense. Nokia was already working with an open source OS in Symbian. Since Android is open source and more malleable than WP7, Nokia could have morphed it and integrated a few of the good things it was already doing in Symbian. Instead, Nokia picked a single platform and chose Windows Phone 7, an uncertain OS that has its merits but is not even a sure thing to survive the mobile platform wars of the years ahead -- even with Nokia's support. Leading up to this decision, ZDNet's Larry Dignan and I talked a lot about what Nokia might do and that the best move would be to just become an awesome mobile OEM and support both Android and Windows Phone 7. I still agree with that. In the short term, going exclusively with WP7 will likely cause Nokia phone sales to plummet even further in the market share race as traditional Nokia fans flee the flock. Fewer would have fled if Nokia offered Android phones.
  • What happens to the other WP7 partners? - Remember that this deal does not make Nokia the exclusive hardware maker for Windows Phone 7, but it appears to give them favored status. What will that mean for Samsung, HTC, LG, and Dell? Will they be even less likely to put much energy into the WP7 ecosystem? Besides Dell, the other three have certainly put a lot more emphasis on their Android devices. At CES 2011, they showcased their Android gear front-and-center while WP7 devices were mostly shuffled to the side. These OEMs seem to be using WP7 as a hedge against Android so that if Google gets too pushy they can always threaten to put more of their resources into WP7. The Nokia deal will likely keep them focused on Android with WP7 a second-class citizen.
  • What about Microsoft's reputation in Europe? - Nokia is a European company and Europe is the where it has its biggest fans and it greatest strength in market share. It's no secret that Europe does not like Microsoft. The European Union has been a constant thorn in Microsoft's side because of its Windows and Office monopolies on PCs and European companies have generally been a lot more aggressive about adopting open source, especially where it can replace Microsoft solutions. With the switch to WP7, Nokia will likely push a sizable chunk of its customers into the arms of Android and iPhone.
  • Where's the scrutiny for Stephen Elop? - One of the main reasons Nokia chose Windows Phone 7 over Android is that Microsoft reportedly paid hundreds of millions of dollars to make its mobile OS the primary platform for Nokia smartphones. Also, remember that Elop is a former Microsoft executive, so him siding with his old cronies is no surprise -- even though Elop vehemently denies that he's a Trojan Horse for Microsoft. However, it is a big surprise that Elop has not come under greater scrutiny for the deal, especially from the Microsoft-bashing EU. After all, Elop is still a big shareholder in Microsoft so he is deeply vested in helping his old company continue to succeed, and that is a massive conflict of interest. When challenged on this issue, Elop said he will soon sell all of his Microsoft shares, but that's little comfort since the deal is already done. I don't think we've heard the last of this conflict of interest.

Now that we've run down the challenges, let's talk about a couple of the opportunities:

  • A feature phone feast? - When Microsoft first released Windows Phone 7 I heard a lot of talk coming out of Redmond that the company wasn't trying to just butt heads with Apple and Android but wanted to make a platform that could be used to replace the larger market of feature phones (or "dumb phones" -- the old flip phones and candy bar phones) in the next few years. At the time, I didn't get it. After all, initially WP7 devices cost as much as Android and iPhone and still required a data plan ($20-$30 more per month than a standard cellphone plan). However, Nokia remains a powerhouse in feature phones and if transitions those devices to WP7 and when data becomes a lot cheaper and simply merges into standard cell plans in the next few years then WP7 on Nokia could grab a big chunk of market share in the low end of smartphones.
  • A play against Android's weaknesses? - Android has a number of problems right now - platform fragmentation, inconsistent updates and versions across devices, and "bit rot" (the OS becoming slower and more clunky over time - like Microsoft Windows, ironically). Windows Phone 7 has virtually none of those problems, at least not yet. If lots of buyers start to become frustrated with Android over these issues then Windows Phone 7 could become a legitimate alternative, and with Nokia and Microsoft joining forces on marketing and promotion of their devices you can bet that they will be looking for opportunities like these to jump on and present their devices as a friendlier alternative to Android.

Final thoughts

At the very least, the Nokia partnership will buy Windows Phone 7 a year or two to make its case as a legitimate alternative in smartphones. It will take some of the heat off of Microsoft for the lackluster sales of WP7 so far. Again, my cynical side would say that this move will prop up Windows Phone 7 for longer than the market would have naturally done it, and only because a former Microsoft executive is now running Nokia and pulled off a massive deal. Something about that stinks, and I expect Elop and Nokia will eventually attract more negative attention because of it.

The smarter move would have been for Nokia to support both Android and Windows Phone 7 and let buyers decide which one they preferred. Still, Windows Phone 7 has a chance to become the OS for low-end smartphones and Nokia's next generation feature phone replacements in the developing world. And, if Google doesn't fix some of Android's nagging problems, then Nokia and Windows Phone 7 could be well-positioned to offer an attractive alternative.

But, make no mistake, for now the Nokia/Microsoft deal is not much of a threat to the mobile momentum of Apple and Google.

This was originally published on TechRepublic.

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