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If you enjoyed reading this article, check out our analysis of Nokia’s position before this announcemnet.

Nokia/Microsoft Partnership Highlights

• Nokia restructures its executive board
• Windows Phone operating system to become Nokia’s strategic Smart Phone platform
• Nokia held a 27.6% market share of Basic Phone, but only 13.7% of Smart Phone handsets in 2010
• Microsoft handset operating system sales lag far behind the leaders
• Symbian is more successful, but Windows Phone 7 more modern
• Nokia and Microsoft share an aim of selling to ‘the next billion’ users
• A strong partnership needed to compete effectively with vertically integrated Apple and RIM

Who Benefits From The Nokia Microsoft Partnership?

Nokia is the all-time most successful phone handset supplier, having shipped a staggering 2.8 billion phones since the beginning of 2003. Its success has been in providing reliable hardware through mobile operators, extending its reach into China and Africa. Of all ITC companies it has one of the largest customer bases and can realistically talk about selling to ‘the next billion’. Its business relationships include virtually all mobile Telecom service suppliers. However over the last few years its star has been eclipsed by the rise of RIM and Apple. The latter in particular has used a much more vertically integrated strategy to achieve undreamt-of results – especially for a handset newcomer (see Figure 1 for a comparison of Basic and Smart phone market shares in 2010). Nokia looks old-fashioned for hanging on to the values of the horizontal market. If it uses its new structure to make this the strongest of its many partnerships, it should be able to start delivering competitive results in the Smart Phone and Smart tablet areas. However it needs to focus on ‘time to market’ issues – working in coalition makes decision making harder than in a single company with a strong command/control ethos.
Microsoft is the world’s largest software vendor and in Q4 2010 delivered the largest ever net profit for an IT supplier. Its success has also been build on a horizontal market model in which its operating system, tools and applications form a strong layer above computing hardware and below networking and other components. It has relationships with virtually all hardware suppliers and is very collaborative in its approach. We recently predicted that Microsoft might become a hardware supplier, estimating that it already has revenues of around $1.7 billion annually. If successful new partnerships such as this one and the one it has with HP for appliances should help build stronger revenues as customers look more for solutions than ever before. In the Smart Phone market Microsoft has been a successful long-term player, but – like Nokia – has been utterly overshadowed by the success of Apple. We don’t expect Microsoft to focus all of its handset business through Nokia – it will continue to make its operating system available on as many other handset brands as possible. However there may come a time when it becomes advisable for it to jettison these horizontal practices and pick a single hardware vendor in each key market areas.

Nokia Adopts Microsoft Windows Phone As Principal Smart Phone Strategy

In a major shake-up last week Nokia announced a new executive board and a strong tie-up with Microsoft for its Smart Phone and Tablet strategy. We believe these moves are in part a reaction to the substantially better success of Apple and, to a lesser extent, the Google Android suppliers such as Samsung and HTC.
Nokia will bring Bing and adCenter services to the new phones, while Microsoft will benefit from Nokia’s expertise in imaging, Maps and operator billing agreements in countries where credit cards are not widely used. Nokia developers will be able to use Microsoft’s tools and Nokia will be merge its app store with Microsoft’s MarketPlace.
Symbian has been a far more successful operating system than the various versions of Windows Mobile and Phone (see Figure 2 for a comparison of major Smart Phone operating system revenues). However, Microsoft’s Phone 7 operating system and associated Web support services such as MarketPlace are arguably more modern.

Nokia Ovi And Apps Have Failed To Keep Up

It was interesting that last week’s press release failed to mention the Ovi brand, which we assume may be jettisoned as a result of the changes. This is what Ovi has achieved in its short life:

• Ovi opened as an app store in May 2009 and reached a milestone of 1 million downloads of Ovi Maps in February last year
• Nokia has pushed its International advantages, launching Ovi Life Tools in China and Nigeria during 2010 and teaming up with SINA and Tencent to launch Ovi Maps in China
• It also has tie-ups with AT&T, T-Mobile in the US, Orange in the UK and Skype for Ovi and Ovi Maps

Back in November 2010 it announced that downloads had reached 3 million a day and that it had a total of 400k developers working with Ovi. Application counting has never been an accurate way of determining success; however in our opinion Ovi has failed to establish itself as a strong competitor with Apple, or Google Android.

Nokia Has Not Been Addressing Handset Competition Through Acquisition

During the quarter it off loaded one business and announced the acquisition of another. In particular:

• In November Renesas Electronics’ completed the acquisition of Nokia’s Wireless Modem business.
• In December Nokia Siemens Networks announced its intention of acquiring Motorola’s public carrier wireless network infrastructure assets during Q1 2011.

In general it has not attempted to extend its capabilities through acquisition in the handset area. It will be interesting to see the extent to which new structure and Microsoft partnership will change things. Nokia’s new executive board has Jo Harlow as head of Smart Devices (Symbian, Meego and strategic business opportunities) and Mary McDowell as head of Mobile Phone businesses.

This Is Not The First Nokia/Microsoft Partnership

Last week the two companies announced a broad strategic partnership to build a ‘new global ecosystem’. Of course this is not the first time they have worked together or worked on common products. In particular:

• In May 2009 Nokia joined Gemalto, Microsoft and Philips to advance ‘Trust in Digital Life’.
• In August that year it formed a global alliance with Microsoft to ‘design, develop and market mobile productivity solutions’ – the precursor to the latest news.
• In May 2010 Microsoft’s Communicator Mobile for Nokia was launched and in November, the Nokia-Microsoft Exchange ActiveSync direct access email

What is different this time is that Nokia has announced that eventually all of its smart phones will be built on Microsoft operating systems, eventually leading to a decline of its own highly successful Symbian handsets.

What Happens To Symbian And Meego?

Nokia sold its Symbian Professional Services to Accenture in 2009, refined its development strategy to unify Symbian and Meego last October and reaffirmed its commitment to the Symbian platform in November. In its latest announcements it claims to have shipped a total of 200 million Symbian phones to date and expects to ship another 150 million in future. To us it looks as if the Meego platform will continue as a low-end, Open Source operating system. We should remember that Nokia, unlike Apple, doesn’t just sell Smart Phones.

Some Conclusions – Collaboration Is Hard To Do

Depending on their resources suppliers have reacted differently to the increasing demand for solutions from customers. In particular:

• Full range suppliers (Apple, RIM, IBM, Oracle, Symantec) have launched appliances, workload optimised systems principally leveraging their own internal resources – becoming more vertically integrated as a result
• Horizontal players, such as Cisco, EMC and VMWare launching VCE/Acadia and Microsoft, HP for appliances, have introduced a new style of partnership which emphasise the power of the participants, as opposed to the openness of the resultant solution.

Nokia’s partnership with Microsoft has a chance to be successful if executed well and should have benefits for both suppliers, their channels and customers. However collaboration is difficult at the best of times and it is always tempting for vendors to revert to practices that made them successful in the past. We will judge the success of this enterprise by measuring the two companies’ market share in Smart Phone, Smart tablet and phone operating system areas. If it does not succeed Microsoft and Nokia are likely to become marginalized as Apple, RIM and Google Android enjoy harvesting ITC’s strongest market.
The data presented in this post comes from ITCandor’s mobile handset tracking activities – please let us know if you need more.

Filed under: Microsoft, Mobile Phone Handset, Nokia, Smart Phone Tagged: | Accenture, adCenter, Basic Phone, Bing, handset, Jo Harlow, MarketPlace, Mary McDowell, Meego, Microsoft, Nokia, Nokia Siemens Networks, Ovi, Renesas Electronics, smart phone, Symbian, Windows Phone 7