Nokia bets farm on Microsoft merger

The struggling Finnish phone company hopes to take on Apple's dominance of the smartphone market

So, Nokia has leapt from the burning platform.

The question now is whether the decision to throw in its lot with Microsoft will be enough ward off the circling sharks or even keep its head above water. The Finnish group's chief executive Stephen Elop yesterday presented his plan to return the company to its former glory, headlined by a deal that could shake up the smartphone market. Standing alongside Microsoft's chief executive Steve Ballmer, he announced the Windows Phone operating system is now the software of choice for Nokia's next generation of smartphones.

Mr Elop has this week shown a lively turn of phrase with his "burning platform" memo that laid bare the struggling mobile giant's problems. Now, he said, was the time to act. And as he outlined a strategy to combat the rise of Apple and Google on mobiles, he conjured up the spirit of Winston Churchill. While he left the "fight them on the beaches" speech for internal staff meetings, yesterday he quoted: "The pessimist sees the difficulty in every opportunity, but an optimist sees the opportunity in every difficulty." Turning to the audience Mr Elop added: "The entire technology industry is founded on this sense of optimist, and I am an optimist."

Nokia's Symbian operating system still ships on millions of devices every quarter, but it is found on low-end, low-margin phones. Despite repeated attempts to match the iPhone, or the devices running Google's Android system in the high end, it has consistently failed. Its market share fell from 36.4 per cent at the end of 2009 to 28.6 per cent a year later and in the last quarter of 2010 more devices were sold with Android than Symbian for the first time.

Nokia's board realised it was staring into the abyss in March last year and six months later fired chief executive Olli-Pekka Kallasvuo, bringing in the Canadian former Microsoft executive Stephen Elop. The move was already a radical one for the company. He was the first non-Finnish chief executive in its 145-year history. Competing in the smartphone market was near the top of his inbox, and less than five months later comes the tie-up with his former employer. Nokia and Microsoft said the plans they had drawn up would "ensure collective leadership in the smartphone market and in the ecosystem that surrounds it". Nokia brings its "tremendous brand," Mr Elop said, mobile devices, an application store, and maps. Microsoft will bring the Windows Phone 7 software, and brands including Office, Xbox Live and Bing. While the company expects 150 million more devices with Symbian to ship, yesterday's announcement that "Windows Phone is our primary platform" in effect spells the end of Symbian. The alliance is also embracing the mobile operators. Mr Elop said: "The operators, more than anything else, need a credible alternative and what happened today, is this is now a three horse race. This is what the operators heard and what to hear about in more detail."

Microsoft has much riding on the deal as well. It has been desperate to stamp its mark on the smartphone market, and unveiled the latest series of Windows phones at the annual industry trade show last year. They were reviewed better than ever before, yet have still failed to gain the traction they want. Mr Ballmer said: "We dream bigger, more innovation, greater global reach and more scale. This partnership with Nokia will dramatically accelerate the development of a vibrant strong Windows Phone ecosystem."

Carolina Milanesi of Gartner said: "It's not like either were spoilt for choice. But Microsoft and Nokia basically created the smartphone market at the turn of the century by realising that customers would not want phones just for voice. They have gone from being big rivals to partnering for the fight back."

Andrew Harrison, chief executive of Carphone Warehouse, said it marked an "exciting chapter in the history of the industry. The deal makes Microsoft a key contender and gets Nokia back to the forefront of the smartphone revolution".

Others were less effusive. Analysts at Megabuyte said: "It is clear that Nokia had to do something to arrest the decline in its once impregnable devices business," yet as with many others, it questioned whether tying up with Microsoft was the right move. "We are unconvinced that bringing together two relatively weak parties will arrest Nokia's decline," and suggested a better deal would have been to buy Research in Motion, the maker of BlackBerry.

Nokia had also held talks with Google over moving its phones to Android but ruled it out of fears it would not be able to differentiate its devices. The collapse of talks was followed by a tweet from Google's Vice President Vic Gundotra, who said "Two turkeys do not make an eagle".

The Megabuyte analysts said the deal would not boost profits in the short term, saying Nokia's failure to issue full year forecasts for 2011 and 2012 show "clearly the company does not expect any near term improvement in financial performance".

There was no handset announced yesterday, and neither chief executive would put a date on a release. Nokia has already been burnt after its latest challenger to the smartphone market, the N8 ,was delayed several times. Mr Elop seemed reluctant to allow the headline writers another crack if something went wrong, saying only: "We can move faster through this partnership than we have before."

Some questioned the fact that for Microsoft, the deal is not exclusive, leaving competitive Windows devices such as those developed by Samsung and HTC. Adam Leach, the principal analyst at Ovum, said: "There remains a danger that Nokia could end up as merely a vehicle for Microsoft and services should it fail to differentiate from other Windows Phone 7 makers such as HTC, Samsung and LG." Ms Milanesi disagreed, and believes other manufacturers would move away from Windows . "Ballmer couldn't say it was an exclusive tie-up, but I think in reality it will prove to be."

The smartphone shift was just one part of the Mr Elop's planned overhaul for Nokia. The company said it would target cheaper models in its portfolio to "aggressively compete in that space" that will "connect the next billion" to the internet. He added that the company would be focused on investment in "disruptive" technologies, and he has also shaken up the management team and the organisation's structure. The group is looking to slash costs, and while Mr Elop referred to streamlining its distribution and outsourcing contracts he added there would be "substantial" reductions in headcount.

He said: "What is already happening is a change of attitude and behaviour. With a clear strategy the fighting spirit of Nokia worldwide and the Finnish people is being brought to bear." Mr Elop has mastered the emotive language, but he will not be given long to show results.

Product range in need of a strategic hit

Nokia 5110

Many will look fondly back at the 5110 as it was one of the first phones to feature the game Snake. Released in 1998 the device was hugely popular but found itself on the scrapheap in 2002, replaced by the smaller, smarter phones that flooded the market. It was one of the first devices allowing users to customise it in a range of colours.

Nokia 3310

Took up the baton from the best-selling 3210, which sold 160 million. The 3310 proved another hit, selling 126 million. It had more features than its predecessor, and allowed longer text messages. The later 3330 brought in WAP and animated screensavers.

Nokia 7650

This smartphone from 2002 had a pull-out keyboard, offered multimedia message service and a colour display. It was the first Nokia phone to run the Symbian operating system and also the first to have an inbuilt camera. The phone was promoted as a tie-in with futuristic Tom Cruise thriller Minority Report. It also had Bluetooth connectivity.

Nokia N8

The N8 was Nokia's latest attempt to muscle back into the smartphone market after losing ground in high-end devices to Apple's iPhone, those running Google's Android and BlackBerry. It did not help itself by delaying the launch twice, but the phone was relatively well received. It had Nokia's latest Symbian operating system and a 12 megapixel camera, but failed to reverse its fortunes in the market.