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Nokia's Microsoft Pact: Why Apple And Google Won't Blink

First Posted: 02/11/11 05:03 PM ET Updated: 05/25/11 07:30 PM ET

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Nokia's cell phone software has been compared to a turkey, a rotting corpse, and, by the company's own chief executive, a "burning platform" about to be consumed by the "blazing fire" set by its competitors.

These are hardly the analogies one would expect for a company that has been the largest mobile-phone maker in the world for over a decade. Nokia sold nearly 10 times as many phones last year as Apple, that darling of Main Street, Wall Street and Silicon Valley -- 453 million units to the Cupertino company's 47.5 million.

But Nokia's dwindling market share, which dropped 10 percent in a year to 28.9 percent, tells a different story: that of an established company hemorrhaging customers to innovative, nimble rivals who are upending the balance of power more quickly than ever before. According to the research firm Canalys, 2010 saw Google's Android operating system surpass Symbian, Nokia's mobile platform, to become the top smartphone software in the world.

Desperate times call for desperate measures. Early Friday, Nokia announced a deal with Microsoft to abandon its own cellphone software in favor of Microsoft's Windows Phone operating system. The alliance, amicable but not exclusive, marks a strategic effort by both companies to reverse their sagging fortunes in the mobile marketplace.

Yet analysts suggest Nokia still has more to worry about than either Google or Apple.

By allowing Symbian to die off, the Finnish company effectively intends to kill one arm of its business in order to focus almost exclusively on hardware. Turning its back on its software ventures has two major consequences: first, it means Nokia will be forced to rely on third-party companies to supply the brains to its smartphone bodies. Second, it forces Nokia to compete directly with companies like Samsung and HTC that have years of experience focusing solely on developing competitive hardware for choosy consumers who expect ever-sleeker, smarter, faster devices.

"Nokia no longer defines its own destiny and that's a loss," said Sascha Segan, a lead analyst for PCMag Mobile. "Nokia put its destiny in hock to Microsoft. For first time, Nokia's success is very dependent on how often someone else puts out their software platform."

While the move away from software is likely to shrink the company and significantly alter the makeup of its business, experts say such a shift was crucial to Nokia's survival.

"It's probably the best choice among bad choices," Gartner analyst Michael Gartenberg said. "But again, when you're standing on a burning platform, your options are limited. You have to get off and get off quickly."

Though teaming up with Microsoft was a drastic measure for Nokia, analysts say Apple and Google will barely blink. Neither Redmond nor Espoo has unveiled a secret weapon: Nokia and Microsoft's Windows Phone are both known quantities, neither of which have thus far stood in the way of Android or the iPhone. And while Nokia and Microsoft are powerful brands with distinguished legacies and still-robust market share, they lack momentum in the marketplace. Windows Phone 7, Microsoft's bold attempt to reinvent its mobile offering, was a critical success that wowed reviewers but has failed to spur an influx of consumers. It's an iPhone rival, not an iPhone killer.

"My guess is that it's business as usual in Cupertino," Gartenberg said of Apple's reaction to the Nokia and Microsoft announcement. "Apple tends to say, 'here's our strategy, we're going to execute against it.'"

That Nokia picked Windows Phone over Android is a loss for Google -- Google executive Vic Gundotra griped about the "two turkeys" in a tweet -- though not a crippling one. And after all, there is still a chance Nokia may turn to Google to power a future line of phones.

"This will not cause either [Apple or Google] to worry more than they were already. These companies are on their toes," Segan said. "You could even say this is better for Google and Apple because there is no disruptive surprise to deal with. For a while now, Symbian has been a rotting corpse Google and Apple are taking bites out of."

Ultimately, the products of the new partnership are what will determine whether "Nokiasoft" will be able to upset the balance of power in the ever-more-important smartphone market.

"They have to ship something that is interesting, compelling and that captures the hearts and minds of consumers," Gartenberg said. "Nothing more, nothing less."

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