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 PocketGamer.biz. "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.

News and Related Story Links:

• Wall Street Journal:
  Full Text: Nokia CEO Stephen Elop's ‘Burning Platform' Memo
• AppleInsider:
  Gartner's iPhone, Android predictions radically revised in a year and a half
• Internet Retailer:
  Nokia and Microsoft: Too late?
• Financial Times:
  Nokia's Microsoft tie-up still under scrutiny
• ABI Research:
  Android Will Seize 45% of Smartphone Market by 2016, Says ABI Research
• IDC:
  
  IDC Forecasts Worldwide Smartphone Market to Grow by Nearly 50% in 2011
• All Things Digital:
  Nokia's Stephen Elop Responds to Those Who Oppose His Big Windows Phone Deal
• Computerworld:
  Windows Phone as No. 2 by 2015? Really?
• Bloomberg:
  Microsoft Is Said to Pay Nokia More Than $1 Billion in Deal
• Bloomberg:
  Nokia Tumbles on Concern Partnership With Microsoft `May Kill' Phonemaker
• IHS iSuppli:
  Nokia/Microsoft Alliance Carries Downside for Cell Phone Giant
• PocketGamer.biz:
  Windows Phone 7 game sales are disappointing; there's no upside, say developers
• Wikipedia:
  Windows Mobile