Nokia Deal Sure to Derail Microsoft's WP7 Partnerships

Nokia (NYSE: NOK  ) yesterday filed a 273-page annual report that includes some details about the expected risks and possible benefits of its recent decision to adopt Microsoft's (Nasdaq: MSFT  ) Windows Phone 7 as its primary smartphone platform. It's an all-or-nothing bet, and Nokia could easily be screwed if only one of 69 domino pieces falls. And if it wasn't clear so far, Windows Phone 7 will also depend on Nokia, as Microsoft's commitment is unlikely to encourage any other companies to compete with Nokia. Competing against Nokia with a WP7 phone would be business suicide.

Investor communications and reports have to include cautionary statements. However, any investor reading Nokia's cautionary notes surrounding the Microsoft deal and its decision to drop Symbian and MeeGo in favor of Windows Phone 7 is depressing, a virtual plea to shareholders to drop Nokia shares now. In 12 pages of scary risks, we counted 69 explicit and key risk factors and reasons why the partnership with Microsoft could fail and why Nokia could go down the drain. As an investor, you need to have a lot of faith in Nokia CEO Stephen Elop's move to go with Microsoft, as well as confidence in his buddy Steve Ballmer, CEO of Microsoft.

The most dramatic aspect of these risk factors is that many of them are not in Nokia's power to influence but instead depend very much on Microsoft and Windows Phone 7, which Nokia even describes as an unproven platform. I cannot quite remember any other time in IT history when a market leader dumped its own assets and bet the farm on something new -- and succeeded with such a strategy. Windows Phone 7 may be backed by Microsoft, but the fact is that we haven't even seen proof that Microsoft can update its phones without a hiccup. Here's a taste of Nokia’s risk factors:

  • "In choosing to adopt Windows Phone as our primary smartphone platform, we may forgo more competitive alternatives achieving greater and faster acceptance in the smartphone market. If we fail to finalize our partnership with Microsoft or the benefits of that partnership do not materialize as expected, we will have limited our options and more competitive alternatives may not be available to us in a timely manner, or at all."
  • "The Windows Phone platform is a very recent, largely unproven addition to the market focused solely on high-end smartphones with currently very low adoption and consumer awareness relative to the Android and Apple platforms, and the proposed Microsoft partnership may not succeed in developing it into a sufficiently broad competitive smartphone platform."
  • "The Microsoft partnership may not achieve in a timely manner the necessary scale, product breadth, geographical reach, and localization to be sufficiently competitive in the smartphone market."
  • "We do not currently have tablets in our mobile product portfolio, which may result in our inability to compete effectively in that market segment in the future or forgoing that potential growth opportunity in the mobile market."

Of course, Nokia also notes the upsides of the deal and mentions that it will drop Symbian over time but expects to still sell about 150 million more Symbian phones in the years to come. It is hopeful that it can transition 200 million current Nokia users to a Windows smartphone. This year and next are expected to be transitional years for Nokia: "During this transition, we believe that our Devices & Services business will be subject to significant risks and uncertainties," Nokia states. "Those uncertainties, among others, include consumer demand for our Symbian devices and potential market share losses as competitors endeavor to capitalize on our platform and product transition. Therefore, we believe that it is not appropriate to provide annual targets for 2011 at the present time."

However, Nokia bets its opportunity on the combination of assets: "Nokia would bring assets such as its brand, hardware, productization, global reach, application store, operator billing support, maps, and location-based assets to the partnership. Microsoft would bring their next-generation smartphone platform with Windows Phone, as well as search, broader advertising, e-commerce, gaming, and productivity assets such as Bing, AdCenter, Xbox Live, and Office." Nokia intends to compete against other Windows Phone 7 partners through its assets as well as with the "distinctive Nokia design" in its devices. Realistically, Nokia may not have to compete, in the end, as the company clearly expects preferred treatment from Microsoft.

"The Microsoft partnership would provide us, however, with opportunities to innovate and customize on the Windows Phone platform with a view to differentiating Nokia smartphones from those of our competitors who also use the Windows Phone platform," Nokia states. This is a rather surprising statement that indicates that Nokia will have access to information and resources that other partners will not be able to use. Considering that Microsoft is collecting royalties from its partner for every Windows Phone 7 phone sold, this is, more or less, a request to drop WP7 now and move to Android. Given the circumstances and competitive risks from the Nokia/Microsoft partnerships, as well as the obvious relationship between Elop and Ballmer, current Windows Phone 7 partners could consider the platform more a threat than an opportunity. If that's the case, then Microsoft and Nokia may be on their own.

Nokia may be important to Microsoft, but neither Nokia nor Microsoft has shown that it has what it takes to compete in the modern smartphone battle. If Nokia really needs two years to transition and Microsoft makes more dumb moves to alienate the partners that got WP7 off the ground, the platform will be toast and Nokia will die along with it.

Microsoft needs all the support it can get these days, yet it decided to pour a rumored $1 billion into Nokia -- and Nokia already gives examples of how the Microsoft partnership could pay off: "We also expect to receive substantial sales and marketing support from Microsoft for our combined devices and services efforts with the goal of lowering those operating expenses over the longer term." And: "[T]he planned Microsoft partnership should enable us to make more focused R&D investments in operating systems and services, which is expected to result in lower overall R&D expenses over the longer term in our devices and services business."

Is anyone still interested in competing with Nokia? I have rarely seen a case where Microsoft has shot itself in the foot in such an effective way. The brown Zune MP3 player may have killed Microsoft's ambitions to compete with a music player. The Nokia partnership and the way it is communicated, however, could eliminate Microsoft's next mobile platform and bring into question the company's role as a major OS provider down the road.

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Read/Post Comments (12) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 12, 2011, at 12:40 PM, Henry3Dogg wrote:

    Just as Google calling Nexus S "Pure Google" will derail Android relationships.

  • Report this Comment On March 12, 2011, at 1:25 PM, websterphreaky wrote:

    Wolfgang Gruener is a noted MSFT basher and CrApple Troll /Hack. Take anything this clown has to say with a grain of salt when it comes to Tech.

    Gruener, go back to doing analysis on Toilet Paper, it's appropriate considering the content of your Pap.

  • Report this Comment On March 12, 2011, at 2:10 PM, zaxbowow wrote:

    Ibid (websterphreaky)

  • Report this Comment On March 12, 2011, at 2:18 PM, zaxbowow wrote:

    Ibid (Henry3Dogg), too.

    That Microsoft Dell partnerhip has really been wreaking havoc lately on the Microsoft Lenovo partnership.

    Wolfgang: Step back from the reality distortion field. Seek help. Seriously.

  • Report this Comment On March 12, 2011, at 2:34 PM, ncyvly0520 wrote:

    With the infrastructure set in both companies, the advantages for future growth far outweigh the risk being taken. There will always be new buyers for these products and if both mgmt teams can implement MSFT windows in there, it will be a winner despite how anyone currently wants to spin it.

  • Report this Comment On March 12, 2011, at 10:59 PM, techy46 wrote:

    I read the cautions and risks and I also found it included:

    "The Microsoft partnership would provide us, however, with opportunities to innovate and customize on the Windows Phone platform with a view While we transition to Windows Phone as our primary smartphone platform, we will continue to leverage our investment in Symbian for the benefit of Nokia, our customers and consumers, as well as developers. This strategy recognizes the opportunity to retain and transition the installed base of approximately 200 million Symbian owners to Nokia Windows Phone smartphones over time."

    Well, a 10K is supposed to disclose everything and I'm impressed that thet understand the risks. It these two companies can't build an elegant, stylish smart phone then we'll all have to eat Apple pie and that's not really a good thing.

  • Report this Comment On March 12, 2011, at 11:12 PM, DocG1956 wrote:

    As a developer and investor I am writing Windows 7 apps. I believe MS will be able to make inroads into this market. They have the personel it takes to build the best of breed software and hardware. They will be able to apply serious pricing pressure on their competitors too.

    Gary

  • Report this Comment On March 13, 2011, at 3:08 PM, jimmy4040 wrote:

    "We also expect to receive substantial sales and marketing support from Microsoft . . ."

    There talking about MSFT, mobile phones, and marketing, right?

    No, . . . I mean seriously?

  • Report this Comment On March 14, 2011, at 2:34 AM, ajaykc wrote:

    I agree with websterphreaky.

    I guess this guy (author of this article) is Apple fan and thinks the whole world is going to eat apple only from now on. He should know the other part of the world where people earn less than $2-3 dollars a day and there are so many who don't even work. With that in mind $350 iphone and $500 ipad is a whole lot of money. Most analyst don't even know what they know and then they keep advising.

    5-6% dividend is very compelling reason to stick with this stock. About the product sales and transition, we should leave it to management to deliver and then decide. Nokia doesn't have much market share in US so there is not much to loose. In other markets, nokia still sells a lot of cheaper phones (not smart ones) and those are untouched by WP7 transition.

    The bottom line is...some investments require waiting and for this one, one will have to wait. The reward is 5-6% annual return for waiting and when momentum chasers return then sell it to them.

  • Report this Comment On March 14, 2011, at 10:05 AM, jimmy4040 wrote:

    Or, you could simply invest in something that isn't losing market share and wait until the beginnings of a turnaround to invest in NOK. In the meantime, pick up some longer term options on them.

  • Report this Comment On March 14, 2011, at 10:41 AM, hudsondusters wrote:

    Elop got a lot of kudos for the "burning oil platform" memo, but he's jumping into a possible sinking boat. He made a bet-the-company move when NOK was still a profitable business. Losing out in smartphones, but still cash-flow positive. He could have simply added windows7 to the line-up, not said we're going to be pretty much windows only. The upside isn't worth the risk of destroying the company completely, and as much as it was losing out to Apple and Rimm and the asian white box makers on the low-end, the company was not dead. The burning platform metaphor oversold the dangers.

  • Report this Comment On March 15, 2011, at 2:19 AM, mediafright wrote:

    Exactly 69 Hhh. Keep up the good work.

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