Don't let it get away!
Keep track of the stocks that matter to you.
Help yourself with the Fool's FREE and easy new watchlist service today.
Four or five years from now, when the book can be written on Nokia's (NYSE: NOK ) giant smartphone about-face, I hope that no one accuses the company of playing it safe, whatever the results. By eschewing Google's (Nasdaq: GOOG ) Android, refusing to stick with its strategy of developing both Symbian and MeeGo in-house, and instead adopting Microsoft's (Nasdaq: MSFT ) Windows Phone 7 platform, Nokia is undertaking a colossal gamble, in the name of holding onto a smartphone leadership position that many have assumed is already history.
The risk of a Nokia-Microsoft alliance going nowhere fast and further accelerating Nokia's smartphone market share freefall are pretty significant. I think the move guarantees that 2011 will be a very rough year for the company. But once you weigh all of the pros and cons, there was probably no better choice for Nokia to make if it wants to bring back its glory days, rather than being just another "competitive" face in an increasingly crowded industry.
Why the status quo wasn't an option
By rushing into Microsoft's arms, Nokia effectively gives the kiss of death to its home-grown MeeGo operating system, while also placing its mainstay Symbian platform on life support. But considering the dire straits that its smartphone business now navigates -- IDC estimated that Nokia's smartphone unit share plummeted from 38.6% in Q4 2009 to 28% in Q4 2010, and its revenue share is doubtlessly much lower -- staying the course was really a non-starter. Android and Apple's (Nasdaq: AAPL ) iPhone have been trouncing Symbian on the high end, and Android has also begun gobbling up share in the midrange segment.
Meanwhile, MeeGo was bound to be incredibly late to the game, and no other major phone manufacturer has shown any interest in the platform. From the start, MeeGo had "niche status" written all over it.
Android's dual-edged sword
In that case, why didn't Nokia opt for the very popular Android instead? This is where the debate gets interesting. Over the short term, at least, Android was probably the best available option. If Samsung could emerge as a major Android player as quickly as it did last year, then Nokia, with its R&D and marketing muscle, could've probably done something similar over the next 12 to 18 months.
But over the long run? The odds of Nokia standing out from other big-name Android vendors would be pretty slim. Samsung, Motorola Mobility (NYSE: MMI ) , and HTC have made too much headway with their Android businesses to become marginalized, if Nokia were to join the show. And while there's been a bit of room to differentiate Android phones from a hardware standpoint, attempts to differentiate them based on software have mostly failed. Throw in all of the cutthroat competition that Nokia would face from Chinese Android manufacturers on the low end, and it's tough to see the company's Android sales accounting for much more than 10% of global smartphone shipments over the long haul. With so little software differentiation, the long-term margins on those sales might not be so hot, either.
What Microsoft brings to the table
At first glance, and probably second glance as well, Microsoft looks like a very improbable savior for a beleaguered wireless giant such as Nokia. The company's now-scuttled Windows Mobile platform ended up being blown out of the water by Apple and Research In Motion (Nasdaq: RIMM ) . But take a closer look at the details, and there are reasons to think that Windows Phone gives Nokia a chance to turn things around. Here's why:
- Windows Phone 7 Series is pretty innovative. I've spent a bit of time playing around with Windows Phone 7 devices, and I'm generally impressed with what Microsoft has accomplished. Far from creating a me-too clone of Android or Apple's iOS, Mister Softy managed to build something radically different. Features such as "hub" apps that span multiple screens, home-screen "tiles" that turn up relevant information, and deep integration with the company's Xbox Live, Zune, and Office platforms mean that Windows Phone should be perfectly capable of standing out from the crowd.
- Manufacturers are lining up. Four Android manufacturers -- Samsung, HTC, LG, and Dell -- have already released Windows Phone 7 devices, and more will probably join in this year. These manufacturers don't want to be completely dependent on Google for their smartphone livelihoods, and Microsoft can now present a viable alternative. From Nokia's standpoint, this level of support from competitors is nearly perfect -- strong enough to draw in developers and increase consumer interest, but not strong enough to keep Nokia from being the platform's clear No. 1 vendor.
- Nokia and Microsoft have a "special relationship." Nokia CEO Stephen Elop went to great lengths on Friday to point out that Nokia's deal with Microsoft grants his company the ability to both deeply customize the user experience on its Windows Phone devices and collaborate with Microsoft on the platform's development. Microsoft appears to be granting Nokia large financial considerations as well. The extent of these perks would never have met Google's approval; combined with Nokia's traditional strengths in hardware design, battery life, and low-cost manufacturing, the cozy partnership with Mr. Softy gives the company a real chance to differentiate its devices relative to other Windows Phone licensees and the broader smartphone market alike.
If everything goes as planned (a big "if," certainly), the future of Windows Phone might look less like that of Windows Mobile, and more like that of Xbox: a Microsoft platform that slowly managed to become a legit alternative to the solutions of rivals who already possessed huge customer and developer bases, thanks to a combination of innovation, huge financial resources, and sheer force of will.
Short-term pain = long-term gain?
The market gave a clear thumbs-down to Nokia's decision on Friday; Wall Street might have seen the move as good news for Microsoft and Qualcomm (Nasdaq: QCOM ) -- the latter's Snapdragon chips having been designed into the first batch of Windows Phone 7 devices -- but less so for Nokia itself. And considering the uncertainty now hanging over Nokia's future -- Symbian share losses will probably accelerate, and the first Nokia Windows Phone devices might not arrive until 2012 -- there's probably more pain in store for its shares over the near-term.
But when the market is finally done is done extracting its pound of flesh, there could be a good buying opportunity for investors willing to take a gamble on a company that just made a big gamble of its own.