A Report Card: The Nokia/Microsoft Partnership

Evoking images of the Allies landing at the Normandy beaches in 1944 Nokia Chief Executive Stephen Elop said in late January that the Finnish mobile phone maker had managed to “establish a beachhead” in the smartphone market. Instead of British, Canadian and American soldiers, though, it is Nokia’s Lumia series of smartphones – the 710, 800 and 900 – outfitted with Microsoft’s Windows Phone software that have done the landing.“Our specific intent has been to establish a beachhead in this war of ecosystems, and country by country that is what we are now accomplishing,” Elop said.From this beachhead of more than one million Lumia devices, you will see us push forward with the sales, marketing and successive product introductions necessary to be successful.”

Maybe. The three phones have received generally good reviews and seem to be gaining some traction in the hyper-competitive smartphone market. But it is still far from certain whether Nokia and partner Microsoft will make it off the beachhead and onto more stable ground. This market is all about the ecosystem — the collection of companies and services that sprout up around an operating system. It is hard to imagine the iPhone having such meteoric success without all the third-party applications available in the Apple App Store. About 20 billion apps have been downloaded and that number is growing at a clip of about one billion a month.  The situation is much the same with Android, where a flourishing app market offers seemingly infinite possibilities for everything from losing weight to tracking prices at the supermarket.

 

Such ecoystems are the key to sustained revenue growth. Apple and Google have created a new market rather than using the legacy handset-driven value chain.

 

That's why a year ago Nokia, struggling to compete with Apple’s iPhone and devices running Google’s Android operating system, turned to computer software giant Microsoft, a one-time rival and a player that is still considered an underdog after more than a decade of trying to penetrate the mobile sector. “Nokia and Microsoft will combine our strengths to deliver an ecosystem, with unrivalled global reach and scale,” Elop, a former Microsoft executive, promised at a February 11, 2011 press conference. “It is now a three-horse race.”

 

That, at least, is the hope. One-time smartphone market leader Blackberry’s future is looking increasingly like that of a niche player. Once an almost obligatory choice for corporations, RIM has been losing that core client base. One recent defector is Halliburton, one of the largest providers of products and services to the energy industry, which earlier this month said it would switch 4,500 employees to the iPhone. The success or failure of the Nokia-Microsoft alliance will therefore be a critical test case to see if the smartphone market will remain a duopoly or if there is indeed room for a third major player.

 

“Microsoft and Nokia face an uphill battle both from the Windows side and with Nokia trying to establish itself in the smartphone arena,” says Craig Cartier, a technology analyst at consultancy Frost & Sullivan. “But they have a lot of resources so we can’t count them out. If they do this right they will win over some customers and get people talking about Nokia again.”

 

Nokia had a head start – it was talking about transforming itself into a software company in 2000, some eight years before the first iPhone hit the street. But Nokia and Microsoft have both been largely absent from smartphone discussions of the past several years. The former has been unable to produce handsets that can compete with the iPhone or with Samsung and HTC, the two largest makers of Android phones, while the latter never managed to convince cellular phone users that the Windows operating system, so ubiquitous on computers, was a compelling choice for a mobile device.

 

Nokia had a 12.4% share of the smartphone market in the fourth quarter, a drop of 15% from the last quarter of 2010, according to estimates by technology consultancy IDC. Apple and Samsung led with 23.5% and 22.8% respectively, both large increases over the same period last year.

 

Rather than a reflection on the new Lumia phones, which hit a limited number of markets in November, Nokia’s decline is an indication of the precipitous drop in the popularity of handsets running the company’s Symbian software.

 

As Nokia struggles to regain its footing in the smartphone market and shifts away from Symbian and towards Windows Phone, the company announced this month that it would cut 3,300 factory jobs in Europe and 700 in Mexico, moving more of its smartphone production to Asia. The company is also coming off a 1.1 billion euro loss in the fourth quarter as sales tumbled 21%.

 

Nokia has never had much success in the U.S., even in its heyday when two out of every five mobile phones sold in the world was a Nokia handset. It made major mistakes in that market, missing clamshells, qwerty keyboards and touch screens. Downplaying the U.S. was not an issue when that country was a mobile backwater. But the American market is now at the center of the  mobile Internet.  It is there that the Finnish manufacturer and its new American partner from Washington state will either fail or succeed in the smartphone market, say analysts.

 

“In the smartphone market if you want to be successful you have to be successful in the U.S.,” says Bengt Nordstrom, CEO of Northstream, a consulting firm that advises telecommunications companies. “The industry is very North American-centric. A lot of the innovation and developments are happening in the North American market and a lot of the profits come from there.”

 

Nokia, for its part, is now very focused on improving its showing in the U.S. market, the only place so far where the Lumia 900, the manufacturer’s most high-end smartphone, has been released. “The US market is extremely important not only because it is very big from a smartphone point of view, but also because of the influence it has,” says Waldemar Sakalus, a Seattle-based Nokia vice president for the Nokia-Microsoft alliance. “Many important developers, investors, bloggers and journalists are in the U.S. The importance of the market goes beyond the size itself.”

 

From mid-November until the end of January Nokia sold one million Lumia handsets, impressive just coming out of the starting gate, especially considering that the 900 did not reach stores until after the new year. However, in only a slightly longer period (from the beginning of September to the end of December) Apple sold 37 million iPhones.

 

Worldwide, in the fourth quarter Nokia sold 20 million smartphones while in all of 2011 it sold 417 million phones, of which 77 million were smartphones. The 710 and 800 models have been introduced in Britain, France, Germany, Italy and several other countries. And the Lumia series will begin selling in China and Latin America in the first half of this year.

 

Nokia and Microsoft have tied their futures to their smartphone partnership, but ironically, if they are successful Nokia will find itself with new competitors using the Windows Phone software, which like Android is open for all manufacturers to install on their handsets. Touch-based Windows Phone is a long way from previous incarnations of Microsoft mobile phone software and has shed any visible connection to the Windows operating system that runs the majority of the world’s computers.

 

“We are building with Microsoft an ecosystem where Nokia is not the only player,” says Sakalus. “We are conscience of this and welcome it because it expands the platform’s viability. We think we will be the choice for customers when Windows Phone scales up and has other manufacturers. We are not afraid of competition.”

 

Analysts believe that to be successful, the pair will need to introduce new, improved handsets in  2012 to show that Nokia and Microsoft are committed to the venture.“In the next six to nine months they have to respond to what we presume will be the iPhone 5 and the new Samsung Android phones,” says Nordstrom. There is also pressure to increase the number and range of apps available to consumers using the Nokia Microsoft ecosystem: there are roughly ten times the number of apps available on Apple and Android phones.

 

Just as it was not clear the Allies would hold their beachhead in Normandy, there is still the chance that Apple’s iPhone and the myriad of devices running the Android operating system will manage to push Nokia into the sea, say analysts. “At some point you have to wonder in terms of platform strength whether Android and the iPhone are just too far ahead,” says Frost & Sullivan’s Cartier.  

 

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