Microsoft and Nokia: Three reasons for a mobile marriage

Will Nokia team up with Microsoft to put the Windows Phone OS on Nokia's mobile handsets?

Will Nokia team up with Microsoft to put the Windows Phone OS on Nokia's mobile handsets? The idea gained steam last week after Berenberg Bank analyst Adnaan Ahmad sent an open letter to both companies pleading that they save themselves by forming an exclusive partnership.

It's doubtful that either Microsoft CEO Steve Ballmer or new Nokia CEO (and former Microsoft exec) Stephen Elop gives a hooey what a banking analyst thinks, but a mobile partnership could solve a lot of problems for both parties.

Wall Street certainly likes the idea, as shares of Nokia rose four per cent throughout last week amid speculation that Nokia would announce an alliance with Microsoft that will bolster both the companies' struggling smartphone businesses.

This Friday, CEO Elop is scheduled to make a speech to Nokia investors. Speculation abounds that a Microsoft mobile partnership will be the main subject of the speech.

If such a partnership does develop it would be a departure for Nokia, which historically has looked inward for software solutions. But Nokia, which not too long ago owned about a one-third of the U.S. cellphone market, has slipped badly. Nokia's U.S. market share numbers dipped to low single digits as Apple's iPhone, RIM's BlackBerry and, especially Android based phones, have surged ahead.

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Now's the time for desperate measures for Nokia. With its market share falling off a cliff and its own expensive smartphone OS, MeeGo, failing to gain traction, Nokia may have to look to the outside world for a life raft.

With Microsoft, Nokia would have a partner who has mobile maladies too. Windows Phones are, by all accounts, solid smartphones that users seem to enjoy when they actually use them. The problem is getting people to choose a Windows Phone over other established darlings like the iPhone, Droid phones and BlackBerrys. Microsoft has a $500 million ad budget for Windows Phone 7, elite hardware partners like Samsung and HTC, plus respectable wireless carriers in AT&T and T-Mobile. But the company only sold two million units in the last quarter of 2010, which analyst Ahmad points out in his letter, "is just not going to cut it."

Here are three ways these two smartphone outcasts could benefit from Windows Phone 7 running on Nokia hardware.

Market Share Win-Win, Here and Abroad

In one way or another, both Nokia and Microsoft are in mobile market share hell -- Nokia in the U.S. (low single digits) and Microsoft globally (three per cent). With exclusive rights to running Windows Phone 7 on its devices, Nokia could get out of the U.S. gutter and grow some share.

Microsoft, in turn, could expand its presence outside the U.S. with Nokia devices. Nokia's global market share slipped by nine per cent in 2010, but it still sits at 30.6 per cent, second only to Android's 32 per cent global share, according to market research firm Canalys. That gives Microsoft the potential to grow its worldwide mobile market share by 20 to 25 per cent over time.

Giving Nokia Windows Phone Flexibility

If Nokia is going to allow its hardware to become Windows Phone 7 devices, they will probably demand a little flexibility to avoid being just another Microsoft OEM. Nokia will likely not agree to the locked-down Windows Phone 7 design specifications that are now being forced upon phone makers.

In his letter, Ahmad suggests Nokia should build its high-end smartphones around Windows Phone 7 and eventually bring costs down to get its smartphones into the mid-range market. Nokia, writes Ahmad, should also be given the leeway to hang on to its Symbian OS and push it out on low-to-mid market smartphones.

Veteran Microsoft watcher and ZD Net blogger Mary Jo Foley writes that granting such leeway is essential to any Microsoft-Nokia mobile partnership ever happening.

"Maybe Microsoft, hoping to boost its market share in a fell swoop a la Yahoo in the search space, will bend the rules and give Nokia more leeway," Foley writes. "If not, color me skeptical of Nokia going the WP7 route."

Nokia Will Be an EXCLUSIVE Non-Android Hardware Partner

One creeping fear for Microsoft is that hardware partners like Samsung, HTC and LG will (understandably) give the more popular Android OS priority over Windows Phone 7.

It's probably too late for Nokia to pursue Android, with its long line of hardware cohorts already in place. That said, WP7 could be the underutilized mobile OS that Nokia could nurture exclusively, and Microsoft could have exclusive rights to a global hardware leader that is contractually bound not to ditch Microsoft for Android.

Elop's chat with Nokia investors on Friday will hopefully put closure on the scuttlebutt about a Nokia and Microsoft mobile partnership.

What do you think: deal or no deal?

Shane O'Neill covers Microsoft, Windows, Operating Systems, Productivity Apps and Online Services for CIO.com. Follow Shane on Twitter @smoneill. Follow everything from CIO.com on Twitter @CIOonline. Email Shane at soneill@cxo.com.

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Shane O'Neill

CIO (US)
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