The combination of assets between Microsoft (Nasdaq: MSFT) and Nokia (NYSE: NOK) is a fascinating alliance that has been born out of the desperation of two giants that aim to score a portion of the global smartphone gold mine. As powerful as Microsoft and Nokia have been in the past, and for all the resources and experience they can throw at developing a smartphone, the partnership is merely an opportunity and not a guarantee for success. Nokia will have to learn to swim in hostile waters that are just waiting to eat it alive. And even if it succeeds, it will lose in the end.
Stephen Elop has taken Nokia by the hand and made the jump. Symbian is burning to ashes, and MeeGo has been taken along like the unwanted stepchild but may be left to drown. Steve Ballmer's Titanic is saving Elop and Nokia from Google's and Apple's sharks for now, but Microsoft has been unable to fix the leaks in its own Windows Phone 7 hull and hopes that Nokia may deliver a miracle. If you think about it, the alliance between Nokia and Microsoft was really the only possibility for both companies to keep the hopes for a brighter future alive.
Nokia: rise and fall
Nokia was once the Apple of the cell-phone industry. The company dominated cell-phone sales with a market lead since 1998 and drove the industry through phenomenal growth above 1 billion sold units every year. It was the driving force to make text messaging popular, and it was a key player behind the adoption of data services, which included, for example, downloadable ringtones and simple games. We should not forget that the smartphone can be traced back to Nokia (if we forget for a moment that Handspring was the company that actually shaped the modern smartphone with the Treo in 2001): Remember the bulky Communicator 9000 from 1996?
In the fourth quarter of 2010, Nokia sold about 124 million phones. However, only 28.3 million of those were smartphones, and only 2.6 million were sold in the United States. Nokia's smartphone sales climbed by 36% year over year, while the entire market climbed by 72% and the stars of the industry increased their sales by almost 100% (Apple) and almost 900% (Google), according to Gartner. Apple now controls the high-end segment of the smartphone market and Google aims for the midrange with Research In Motion (which is also growing below the market average), while there are only scraps left for Nokia, Microsoft, and Hewlett-Packard (Palm).
Nokia's market share has been declining at an accelerating pace -- and has just surrendered its leadership position in smartphones to Android. Having waited for too long already, the company needed to act. Nokia always described Android as a rival and not as a potential partner, and Elop's recent "burning platform" memo continued on that path. Microsoft was the only option. Elop has detailed knowledge of Microsoft, and there may be some unusual synergies that could make the alliance work in a much better way than with two companies whose executives do not speak the same (business) language.
Leaving Symbian behind; cutting MeeGo
Symbian is the obvious casualty of this alliance. There are more questions that surround MeeGo, a platform Nokia birthed in cooperation with Intel. However, the development has been too slow, and we now know that only one device will make it to market in 2011.
Seriously: Why bother?
MeeGo cannot succeed without a platform and an ecosystem. Nokia already said that it plans to pitch Windows Phone 7/Nokia as the "third ecosystem," which would indicate that MeeGo will not be a significant platform.
The netbook UI development has already been abandoned, and it appears that Nokia is simply polite and has not told Intel yet that it has no interest in MeeGo anymore. Would you buy a MeeGo phone, if its future is uncertain? In today's world, probably not. As devices are more connected to an ecosystem of other types of electronics, it will be even more unlikely that you buy such a device -- even as a backup device or for your young children as an emergency communication device.
Let's be realistic. MeeGo is dead.
Microsoft's big advantage and Nokia's problem
Nokia must have been extremely desperate, much more than what we have seen in public. In this alliance, Microsoft is taking the lion's share of the cooperation's benefit. As much as Microsoft said that it was happy with 2 million Windows Phone 7 units sold in Q4 2010, we know that Windows Mobile 6 still outsold the new platform. You can't sugarcoat the Windows Phone 7 performance so far: It has been a failure. We have grown tired of hearing Steve Ballmer tell us that user feedback has been fantastic and that the devices just need to get into customers' hands to see better sales. Sounds a bit like a Saab commercial: "People who test-drive a Saab usually buy one." OK, but how many people do you know who have bought a Saab? And wasn't Saab nearly shut down not too long ago?
Ballmer can talk about user feedback all day long: The problem is that Windows Phone 7 is not selling. Why? Windows Phone 7 is marketed wrong. It's a nice-to-have product without a positive lifestyle factor attached. It is not a must-have product. No one would complain if Windows Phone 7 was discontinued today.
With Nokia on board, Microsoft has an opportunity to get about 30 million Windows smartphones out into the world, every quarter. However, it is an opportunity that will need a lot of TLC to grow and make sense for both Nokia and Microsoft. The two companies have laid out a massive ecosystem approach that can work, but Microsoft will have to dramatically change its view of the smartphone market to have a shot at growth. And we will need to see more than just bold words in a presentation.
Microsoft's problem -- and now Nokia's problem -- is Microsoft's flawed marketing that has created a catastrophic perception of Windows Phone 7. Microsoft tried to be different by telling people that they don't have to really use their Windows Phone 7 devices and that is just a bad idea to be glued to their phones. The company completely missed the fact that consumers actually like to spend time with their phones. The impression of a device that will not encourage interaction is probably not a great sales driver. We at CTech believe that Microsoft's marketing has buried the market opportunity of the current generation of Windows Phone 7. The platform needs a complete relaunch.
Microsoft's opportunity has always been the Xbox 360 in mobile devices. So far, Xbox Live mobile has been only a sideshow. Dear Microsoft: Smartphones are entertainment devices. Have you guys ever thought about making Xbox Live content (and not just shared game data) seamlessly available to smartphones? You could get some ideas from Sony and the Android Market.
Microsoft's problem: Nokia's legacy
Nokia is essentially stuck with a smartphone platform that isn't exactly catering to what smartphone users want today. However, Microsoft's commitment to Nokia could easily alienate other handset manufacturers that are seeing much more success with Android anyway. Why would they deal with Microsoft and measly sales every quarter? They wouldn't.
Nokia may be Microsoft's only hope, but it's not a done deal, as Microsoft's Windows Phone 7 will need amazing hardware to attract attention. Competitive hardware isn't enough, and one more sensor or more pixels on the screen won't be enough, either. There are enough handset manufacturers that are copying the iPhone. Nokia needs to rethink the smartphone in a similar way that Apple did in 2006-2007. If you are a frequent CTech reader, the pitch may be getting old already, but I cannot reiterate enough that a next-generation smartphone cannot be anything less than the Seabird concept phone that was shown on Mozilla's Labs pages.
Nokia and Microsoft have to be realistic and admit that, given the resources the two companies have available, what has been shown so far is embarrassing. There is an opportunity for both to show the innovative power and creativity that has made the companies great. We haven't seen it yet, and now is the time to leverage this potential.
It's make-or-break time for both. However, even if the alliance will be successful for both companies, it is already clear that there can be only one winner. Nokia has lost the platform play and will simply be a handset manufacturer with a few additional assets. Microsoft will be the true winner, as it has an opportunity to keep Windows relevant in a world that is more and more mobile -- and right now does not even recognize Windows as a mobile platform.
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