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February 12, 2011

At a press conference in London yesterday, Nokia CEO Stephen Elop and Microsoft's Steve Ballmer announced that Nokia will abandon its Symbian and Meego operating systems to instead adopt Microsoft's Windows Phone 7 OS. Windows Phone 7 will become the predominating operating system for Nokia smartphones from now on.

Most wireless industry observers agree that the strategy is a drastic one meant to fend off the growing momentum by mobile competitors Google's Android operating system and Apple's iOS.

"We think that this will make a three-horse race," Elop said during a press conference. "It's good for Nokia and it's good for Microsoft. It allows us to move faster than we could otherwise."

Elop and Ballmer explained their company's new tight alliance for mobile phones at today's analyst and strategy meeting that took place in London.

The partnership between the two companies goes much deeper than just an agreement to install Microsoft's OS on Nokia's smartphones. The two companies plan to build products and services together as well as share strategic plans with each other. The vision is to create a third ecosystem that can compete directly against Apple's iOS and Google's Android platforms in the mobile segment.

And regardless of whether they ever consummate their relationship with a true corporate merger in the traditional sense, it's very clear now that Nokia's and Microsoft's fates will soon be inextricably intertwined. If either company fails in its execution of strategy, it will hurt the other and vice versa, something that will likely upset investors in a very big way.

The partnership described by the two executives today is so close that it doesn't take much to wonder why the two companies didn't decide to simply merge from the start. Perhaps they are just testing the waters, but nevertheless, most at the meeting today agreed that it's a very close partnership.

Unlike traditional reseller deals, Microsoft and Nokia plan to combine some assets and collaborate on joint marketing initiatives, as well as share common development plans and build products together as a closely-knit team.

From Microsoft's perspective, the company will bring broader integration of software from all its different products as well as its Bing search capabilities and advertising platform, which Nokia can leverage on its own mobile devices. How the duo will achieve that is still unknown at this time.

Meanwhile, Nokia is the world's largest mobile handset maker, and it will bring its hardware expertise, its vast manufacturing and distribution scale, operator billing relationships and its Navteq maps and navigation business to the table.

Through this effort, the two companies expect that they will be able to drive more revenue into each other's coffers through mobile apps, more services, social-networking integration and gaming via Microsoft's Xbox broad product line.

But the mobile market is extremely different from the PC market, and it's very clear that Microsoft sees the value in Apple's model of owning both the hardware and the software of a mobile device. Microsoft has already demonstrated its willingness to move into the hardware business with the Xbox. And it has built a successful ecosystem around the product.

But the Zune, Microsoft's attempt to challenge Apple's iPod, has not been successful at all, showing that building hardware from the get go is not always the best strategy. Even acquiring hardware hasn't been an easily achievable path for Microsoft, as demonstrated by the acquisition of Sidekick maker Danger in 2008. The fruits of that acquisition was the Kin mobile phone, which was only on the market a few short months before Microsoft abandoned the project completely and focused instead on its Windows Mobile 7 OS.

The software giant has forged many partnerships in the past. Microsoft's core software business is predicated on strong relationships with key partners, such as Dell, Hewlett-Packard and a few others. And it's attempted to partner with other mobile handset makers in the past to get a stronger foothold in the mobile market, but with varying degrees of success.

Even as it pursued its own hardware strategy, Microsoft has continued to seek partnerships with other mobile-hardware makers. In 2009 Microsoft partnered with LG Electronics, which also planned to use the now defunct Windows Mobile platform as its primary platform.

While Microsoft has clearly been down this path before with other cell phone makers, Ballmer said the relationship with Nokia is unique, according to him. Elop simply agreed and explained that executives from Nokia and Microsoft were already working together to align a common strategy, but didn't comment on what it is and how it will work.

But Elop did admit that in the past, Nokia has considered using Google Android as its primary software for smartphones. However, he was quick to point out that the company decided against it because he and his team feared that they probably wouldn't have enough control over the development of the ecosystem. He said he didn't think that Nokia's assets would be valued enough and that eventually it would turn Nokia's products into commodities, something that surprised a few of the analysts in the room.

Elop said "The Google option is a valid option, but at the end of the day it felt a little bit like giving up and not enough like fighting back."

In the end, Nokia could face a similar problem in its new partnership with Microsoft. Windows Phone 7 will not be exclusive to Nokia, which means that Nokia's rivals Samsung, LG, Motorola and HTC will be able to use the platform as well-- no exclusivity here.

But Elop does believe that being beholden to Microsoft is less dangerous in terms of commoditizing Nokia's core attributes than a partnership with Google. While not everybody would agree with such a statement, he emphasized that Nokia has structured its deal with Microsoft so that it would have some control in the development of Windows Phone 7, and much more control than other hardware companies also using the software. So he believes that Nokia will be able to differentiate its product from competitors' products.

Elop said that any advances that Nokia makes in developing the Windows Phone 7 platform or in the ecosystem will be shared among all hardware partners so that Nokia's efforts will also benefit its competitors. But this raises an important question: just how comfortable will Nokia's competitors be in participating in an ecosystem where the largest player in the market has more influence than they do?

So will HTC, Motorola, Sony Ericsson, LG Electronics and Samsung reduce their bets on Android? Well Nokia could end up differentiating itself with Microsoft, because no one else will be willing to use the software.

Before becoming Nokia's CEO, Elop has been the head of Microsoft's Business Division, which includes Microsoft's Office suite of products. Prior to that, Elop held positions at Cisco Systems' routing rival Juniper Networks, as well as other high tech companies such as Adobe Systems and others.

One of Elop's most promising attributes for Nokia is that he knows the U.S. market inside out, after having worked in it for most of his life. But culturally, Nokia and Microsoft are very different. Nokia is the pride of Finland. One former executive said that it was very telling that the company chose a Canadian instead of an American as its first non-Finnish CEO in its 150-year history. Being acquired by an American giant, such as Microsoft could be a hard pill to swallow for many at the company whose blood they say runs Nokia blue!

Analysts had been hoping that Nokia would give up on its efforts to be a software maker and concentrate on building cool smartphones. But they likely would have preferred a relationship with Android, a strategy that has been successful for other mobile handset makers.

While Elop and Ballmer claim that their product offerings complement one another, many people simply see Nokia and Microsoft as two slow-moving dinosaurs that have each tried but have been unable to crack the smartphone market on their own in the past. Their common problem has been an inability to execute in a rapidly evolving market.

At the analyst conference, Elop reiterated that he is planning a big cleanup in the company's executive board, with some key executives that will be soon leaving the company.

No less than five of the nine board appointees will either leave or be replaced by new ones, representing a huge shake up of the company's leadership at the top.

All of this suggests that executive vice president of markets Niklas Savander, chief development officer Kai Oistamo, services chief Tero Ojanpera, and enterprise chief Mary McDowell will be replaced.

However, veteran Alberto Torres will survive the shakeup, since he's been actively working on Meego, Nokia's new mobile operating system. But finance and administration will still remain in Finnish hands, however.

Various reports in the press already suggest that the new structure will be presented to executives on Feb. 10, ahead of Friday's Wall Street analyst meeting.

Elop has already created an executive board post for Jerri DeVard, whose experience includes consumer marketing for Revlon, PepsiCo, Citibank and the group now known as Caesar's Palace, Hurrah's.

But it's really no surprise to see Ojanpera and McDowell's names on the list of people's head on the chopping block. McDowell joined Nokia in 2004, yet the company's lack of headway in the enterprise segment, despite its technological and logistical advantages is one of its major failures lately.

Ojanpera is a radio engineer given the job of a Hollywood mogul, with responsibility for music, video, TV games, software and social networking software and partnerships. All have been major Nokia underachievements. But Savander's inclusion is a surprise. It suggests Elop wants a shift as radical as Nokia's fiercest critics have recommended. And it looks like he's having his way on it.

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Source: Nokia and Microsoft.