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Microsoft-Nokia Deal Doesn't Guarantee a Spike in Smartphone Market Share

While two major research firms predict that the February deal struck between Microsoft Corporation (Nasdaq: MSFT) and Nokia Corporation (NYSE ADR: NOK) will result in a huge jump in smartphone market share for Windows Phone, such gains won't come easily – if at all.

The two companies announced on Feb. 11 that they would jointly enter the mobile smartphone market – in what some might call a "shotgun marriage" – with Nokia making the hardware and Microsoft proving the operating system (OS).

Each company has lost significant market share over the past few years, starting with the debut of Apple Inc.'s (Nasdaq: AAPL) iPhone in 2007. When Google Inc.'s (Nasdaq: GOOG) Android landed the next year, its meteoric rise created a crisis for both Nokia's Symbian and Microsoft's Windows Mobile operating systems.

Windows Mobile's share of the global smartphone market dropped to 4.2% in 2010 from 12% in 2007, according to data from research firm Gartner, Inc. (NYSE: IT). Meanwhile, Symbian's share of the market withered to 37.6% this year from 50.8% in 2007. With Nokia essentially abandoning Symbian for Windows Phone 7 – the successor to Windows Mobile that Microsoft unveiled last fall – Gartner says Symbian's market share will fall to 19.2% by 2012.

"It's a clear admission that Nokia's own platform strategy has faltered," Ben Wood, an analyst with CCS Insight told Bloomberg. "Microsoft is the big winner in this deal, but there are no silver bullets for either company given the strength of iPhone and Android."

Gartner and International Data Corporation (IDC) raised eyebrows when both predicted in quarterly updates that the Nokia partnership would vault Windows Phone ahead of both Apple's iPhone and Research in Motion Ltd.'s (Nasdaq: RIMM) BlackBerry by 2015.

"Up until the launch of Windows Phone 7 last year, Microsoft has steadily lost market share while other operating systems have brought forth new and appealing experiences," said IDC senior research analyst Ramon Llamas. "The new alliance brings together Nokia's hardware capabilities and Windows Phone's differentiated platform."

IDC has forecast Windows Phone will have 20.9% of the market by 2015, with Gartner only slightly less optimistic at 19.5%. Both credited the Nokia deal as the key to the turnaround.

The two research firms cited Nokia's excellent global reputation, particularly outside the United States, its massive distribution network, and its expertise at making low- to mid-range devices, which is where most of the growth is expected to occur.

"Nokia is a world-class manufacturer, so when they click the switch on Windows Phone, it's going to beon," Llamas told Computerworld.

Stiff Competition

Still, while the alliance should help the two companies regain some footing in the smartphone market, it's unlikely to provide the kind of thrust required to propel Windows Phone into the No. 2 position.

A third research firm, ABI Research, in its quarterly update offered a far more skeptical view of the partnership's chances.

"Windows Phone 7… which shipped in two million handsets in Q4 2010, will have to find incredible success through its Nokia channel to take more than 7% of the market by 2016," said ABI senior analyst Michael Morgan.

Investors share that skepticism. On the day the deal was announced investor sentiment was overwhelmingly negative, sending Nokia's stock plunging 14%. It has since drifted lower.

One major issue will be whether the partnership can compete against Google and Apple. These are two powerful companies that are renowned for their ability to innovate, and both have already established strong mobile ecosystems.

"Nokia rightfully acknowledges that the market has transitioned from just phones to a broader ecosystem of devices, software, user experience, applications and content – a total product experience," Forrester researchers Ian Fogg and Charles S. Golvin wrote in a February analysis. "But the union's success faces many questions, primary among them: Is differentiation possible?"

Another concern is the length of the transition from Symbian to Windows Phone; the first models aren't expected until the end of this year or early 2012.

"The biggest question mark here is the timetable," Michael Schroeder, an analyst at FIM Bank in Helsinki told Bloomberg. "Nokia says 2011 and 2012 are transition years, and no one knows how far along Nokia's competitors are by then. Nokia can't do anything to slow its competitors from innovating."

And until then, Nokia must rely on sales of phones running Symbian – which customers now know is a dead OS.

"[Nokia CEO Stephen] Elop has decided to run the risk of really triggering a collapse of Symbian phone sales over the next three quarters," Tero Kuittinen, an analyst with MKM Partners LLC, told Bloomberg in February. "I expected a move to Windows, but not one with this level of religious fervor."

As for Microsoft, its track record in the mobile space is dismal. Windows Phone 7 is not a mere upgrade of its predecessor, but a rewritten OS — an admission by Microsoft of Windows Mobile's inadequacies.

And while Windows Phone 7 was well-received by critics when it launched last year, the platform has not caught on among handset makers – one reason the Nokia deal was necessary.

In an early sign of trouble for the platform, app developers unhappy with their sales so far are blaming slow adoption of Windows Phone 7.

"We had expected more of the platform, to be honest," one developer told "Our feeling is that WP7 isn't selling that well, which would explain our lower than expectedsales."

Granted, the Microsoft-Nokia alliance is strategically sound, but it faces too many pitfalls to trigger the sort of drastic turnaround envisioned by the Gartner and IDC reports.

"I think the [IDC/Gartner] forecast is on the optimistic side given all the turmoil and transitions that need to take place in the next four years to make this happen, and the fact both Nokia and Microsoft need to execute flawlessly – something they have not been known for in the past," Jack Gold, an analyst at J. Gold Associates, told Computerworld.

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  1. Mike | April 15, 2011

    Looks, if you guys do not understand mobile phone business,
    you do not need to write article.

    Your knowledge regarding smart phone is no better than my poor knowledge of derivatives.

    When I saw first iPhone, I know Nokia had real problem.
    But now, Nokia has good chance to add revenues and gain market shares!

    Those Symbian phones are not really smart-phones, there is no such thing as "risk of really triggering a collapse of Symbian phone sales over the next three quarters,"
    Less than 10% of people buy those Symbian phones because it's a *Symbian Smartphone*,
    most of them buy because it's a *Nokia* phone.

    Do you know how poor the sales of first Google phone?
    But when I saw the speed of development, I told my friend Apple is losing the battle. (Back in early 2009 )

    If you look at the Mix11 events about new Windows Mango update, you will be impressed that the Old *Fast moving Microsoft* is back, look at the speed of development, the API, the tools, listen to people who really understand OS and software say about WP7.

    I know Nokia+Microsoft will work, I am betting on it!

  2. kevin | April 15, 2011

    I think Microsoft's PR team are the only people with optimism towards WP7. It is extremely obvious that Elop is acting in Microsoft's best interest and not Nokia. Case and point Microsoft has zero tablet strategy. The success of a tablet will only strengthen the mobile offering of that company. Nokia now has zero tablet strategy. If they went with Android they could create their own custom skin for Android, they could create the own Ovi Market and port all their existing apps their and they could even produce a honeycomb/Nokia tablet. Symbian and Android are both opensource as well. It makes so much sense for Nokia to use Android and its a virtual hail-marry to use WP7. Why wouldn't they just make one phone with Android and one with WP7? Obviously the answer is because Elop is trying to save Microsoft, in regards to this question I have never heard a good answer that would make me think otherwise. Nokia is being played for fools.

  3. Dad | April 15, 2011

    Without question Apple has done great, but their 2 big products are gradually being percieved as toys not tools. RIM is generally percieved as more of a business tool. This may not be fair but it appears to be a growing perception. It is critical that Microsoft and Nokia figure out what and who their market is. There is a lot of money in making toys – but that creates enormous pressure given that children tend to lose interest quickly with their old toys. I find it interesting that RIM's new playbook has a synergestic relationship with the Blackberry cell – you get it all only with the phone. And the size is right (as a tool) – fits in my suit jacket and my overcoat, I can use it on the train and in the plane. My company will likely adopt this over a (percieved) toy. Microsoft/Nokia has to be careful not to get sucked into media talk and look at this potential in the longer term.

  4. Harald | April 15, 2011

    Apple, RIM and Android phone manufacturers must be very happy that Nokia is burying itself with WP7. There is no way that the chemistry of these two global players will allow to create early enough competitive products. The wrong OS, everything too late and insufficient support of Nokia's employees and classic developer clientele. Most strategies which were made on a "green table" don't stand the test of time and real life. The predicted market share of the future for Nokia/WP7 is pure illusion and the result of properly lanced marketing. At least something where Microsoft excels. But in reality it is only illusion, empty promises mixed with FUD addressed to other platforms. I am sorry to see a great hardware manufacturer like Nokia getting drowned by WP7.

  5. Mario | April 16, 2011

    Hey you MM guys! Did you hear about a thing called "Android"?…If you did, than maybe the next comparison will strike a cord on your mind: Microsoft=Commodore.
    For younger readers – Commodore was " the future " in computing arouond 1985…too bad it didn't rotten – we could extract some oil from it….

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