Nokia Makes the Gamble of a Lifetime

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.

Fool contributor Eric Jhonsa has no position in any of the companies mentioned. Google and Microsoft are Motley Fool Inside Value selections. Google is a Motley Fool Rule Breakers pick. Apple is a Motley Fool Stock Advisor recommendation. The Fool has written puts on Apple. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Apple, Google, Microsoft, and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (8) | Recommend This Article (10)

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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 February 14, 2011, at 2:21 PM, rays550 wrote:

    I expect IDCC's court case against Nokia to be favorable to IDCC which I believe will result in IDCC negotiating very favorable licensing terms with Nokia. And if not, I believe it possible IDCC could prevent Nokia from selling phones in USA..

  • Report this Comment On February 14, 2011, at 2:26 PM, jabberwolf wrote:

    This is all panic and fanboyism.

    Nokia was a dead company walking losing market share like crazy.

    most of the comments against MS are by people that have never used the phone OS.

    Its substantially better that Droid, and better than iOS. The one thing lacking are apps, but its one of the fastest growing markets out there.

    Along with the new patch to WM7, Nokia has a new lease on life. They should realize this and not listen to cheerleaders of the other teams whose interests are NOT Nokia's.

  • Report this Comment On February 14, 2011, at 3:19 PM, nidhirajgoel wrote:

    Its pretty interesting that the article starts with the justification on WM choice by saying Nokia will have a stiff competition in Android.

    Funny thing is #2 advantage of going with WM also lists that other phone manufacturers have already building product with WM. Isn't the article contradicting itself?

  • Report this Comment On February 14, 2011, at 3:33 PM, rchaudhary wrote:

    Lack of Strategy:

    =================

    Switching platforms in not new for any manufacturer. But Elop has shown that this big gamble was done without any planning.

    When Apple announced its 'plan' to adopt Intel chipset, they had a demostrate-able product the same day. Which goes on to show that this was a well thought out and proven move.

    Its seems that Elop made the decision based on some power point presentation from Microsoft. If not so, then how come they are talking about a year to even build the first product.

    It also means that this decision was made in silo and that there was no buy-in from other senior management.

    Lack of understanding of Symbian:

    =================================

    Many people, including Elop forget that Symbian actually consists two cores; the kernel or the real operation system and the user interface. Its similar to slapping Gnome user interface on Linux Kernel.

    The problem has always been with user interface; which, if Elop understood could have fixed easily.... and perhaps before 2012.

    Lack of undestanding of problem:

    ================================

    In his statements, Elop said that Nokia spends too much on R&D and is inefficient in converting those ideas in to marketable product. If that is indeed that case (which I agree), then the problem should be solved in R&D department.

    You don't sell your manufacturing unit and become a car dealer because you are unable to convert your prototypes in to sellable models.

    Elop just burnt his oil platform and jumped in the water, because they couldn't sell oil.

  • Report this Comment On February 14, 2011, at 5:49 PM, BR14 wrote:

    No way this decision was made after Elop joined Nokia. His recruitment must have been part of the strategy.

    Furthermore Elop stated today they chose MS on the basis of margins.

    It's highly likely Nokia has avoided Android because they know Android phones will attract a license fee to Oracle for every device once Oracle wins it's patent violation case against Google.

    There is simply no way Google can win that case, and every device will have a $50 penalty (or thereabouts) as a result or be unable to run apps written in Java.

    Oracle stands to make millions (billions?), and once the case is won the manufacturers will have to pay if they want to market in the US.

    Nokia will probably do ok with MS, though it's market leadership position is no doubt lost forever and this was the wrong decision and a slap in the face for both Nokias own developers and their development community.

  • Report this Comment On February 14, 2011, at 6:32 PM, MartinSamuelson wrote:

    Great analysis, Eric. It was a bold move but they were essentially backed into a corner. My prediction is that this partnership will not be a blockbuster, but it won't flop either. They sure have a lot of ground to make, though.

  • Report this Comment On February 14, 2011, at 7:21 PM, melegross wrote:

    I totally disagree with this analysis. I can't find a single thing of importance that's compelling, or even correct.

    Facts can be twisted to mean anything. The twisted logic and incorrect reading of the facts here make this analysis unusable.

  • Report this Comment On February 14, 2011, at 7:59 PM, techy46 wrote:

    This si thye best thing for a very good phone enterprise without a very good smart phone OS and a very good software enterprise that needs a very good phone enterprise. Microsoft doesn't need a lot of revenue for WP7, in fact none. Nokia needs a good phone OS but not the R&D costs. They both get what they want but have to produce phones with gliz and glam in a hurry. Since WP7 phones are already on the market making them pretty and sexy shouldn't take long. It's a good way for Microsoft to spend $5-10 billion and that's what Nokia needs right now.

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