Microkia: The Microsoft / Nokia Partnership Q&A

One week ago today Microsoft and Nokia unveiled their “strategic partnership.” The fallout was immediate.

A thousand Nokia workers walked off the job. Shares of the Finnish mobile giant dropped 14%. Google made a play for disaffected employees. Analysts cut their ratings. Nokia partner Intel was less than enthusiastic about the abandonment of their joint MeeGo effort. The court of public opinion, meanwhile, was even less positive.

Adding fuel to the fire was the discovery that Nokia CEO Elop had a substantial personal financial interest in Microsoft shares. Bloomberg reported today that he’s divested himself of those holdings and converted them to Nokia stock, but the damage was done.

Very little of the above came as a surprise. Elop laid the groundwork for the Microsoft announcement with a scorched earth memo, leaked – presumably intentionally – three days before the announcement, that indicted Nokia’s market position and future prospects both. In the wake of that news, it was clear that Nokia would be looking outside the firm for platform development. Questions as to which platform Nokia would be turning to were answered the same day via a tweet from Google’s Vic Gundotra.

With so many moving parts involved, questions on the implications of the partnership abound. A few of the most common are addressed below in our traditional Q&A format.

Q: Before we begin, do you have anything to disclose?
A: Yes. Microsoft is a RedMonk customer, and we have received review units of the Windows Mobile 7 phones [coverage]. Nokia is not a RedMonk customer, nor are Apple or Google, although we have received Android review units in the past.

Q: What is your high level reaction to the deal?
A: Lost in the shuffle has been the fact that this is a potentially excellent partnership from Microsoft’s perspective. For Nokia, the prospects are less clear. From a time to market standpoint at least, Windows Mobile almost certainly represents an improvement for Nokia relative to their previous strategy. Financially, much depends on how much the per handset royalty a.) compares to their in-house operational costs and b.) is offset by the Microsoft “payments” headed in the other direction.

Q: Aren’t there long term concerns about the Windows Mobile platform?
A: Absolutely, but Nokia can’t afford long term concerns at the moment. The long term is only a concern if you have a future in the short to medium term, which, absent a partnering strategy, Nokia does not.

Q: Why do you say that?
A: Well, Nokia said as much with their decision. Think about it. When the CEO leaks a memo characterizing your current software strategy as a “burning platform,” then outsources platform development three days later to an erstwhile competitor it seems fair to conclude the short term outlook is grim. As Horace Dediu put it:

Clearly, Nokia threw in the towel. Not because they could not build, but because their building processes could not create greatness.

Nokia’s focus right now is not on what might happen two or three years from now, it is where it has to be: surviving the next twelve to twenty-four months. The future of mobile for the next few years is likely to be decided in that timeframe, and Nokia simply can’t afford to wait on a platform that may or may not be viable.

Q: And Windows Mobile will help them to survive?
A: Maybe. Maybe not. But it’s difficult to argue that it doesn’t offer them a better chance than MeeGo and/or Symbian. Put yourself in Nokia’s shoes. You know that Symbian isn’t the way forward. And MeeGo, while interesting technically, is still a science project for all intents and purposes: you’re shipping zero MeeGo devices (bad) and you have zero third party MeeGo applications ready (worse). Optimistically, solving both of those problems is a twelve month exercise, if in fact it can be done at all.

What is the opportunity cost of ceding the market for the next twelve months to Android/iOS and (potentially) RIM/Windows Mobile? Your company. So you make the best deal you can.

Q: But isn’t it going to be months before Nokia Windows Mobile devices are available? How is this any different from a time-to-market perspective?
Q: It will certainly be months, and it could be 2012 before Nokia’s shipping devices in volume. But by adopting an already shipping platform, Nokia is at least not starting from scratch from the developer and application recruitment perspective.

Q: Is Windows Mobile 7 a competitive platform?
A: Aesthetically, yes. In terms of features, functions and applications, not yet. WM7 is an attractive platform, with its tiling system relatively easy to use and differentiated from its competition – at least superficially. The challenge is that the design of the phone reflects Microsoft’s long term approach to building software: integrated innovation. The platform is burdened by network services and brands – think Hotmail, Live.com and Zune – that have been less than successful in the consumer marketplace but are baked directly into the phone.

It’s a nice platform – omissions like cut and paste notwithstanding – that is required to service too many Microsoft brands at present.

Q: What does this mean for Android?
A: In the short term, very little. A partnership with Nokia would have made the platform an even more formidable competitor to iOS, but volume is at present not a major problem for the Android ecosystem. In the longer term, if this deal energizes a Windows Mobile ecosystem that has largely been treading water since its launch, it could mean increased competition for Android and iOS both.

The terms of the partnership do present Google with an interesting opportunity, however; one they would be foolish not to exploit. Expect Android executives to begin visiting current Windows Mobile hardware partners like Samsung to discuss their suddenly second class status within the Windows Mobile ecosystem. As long as Microsoft extends preferential status to certain hardware providers, the opportunity to sow dissent will exist.

Q: Why is it imperative for Nokia to move quickly in the smartphone space anyway? Isn’t the bulk of their traction globally in the featurephone market?
A: Nokia does indeed ship tens of millions of feature phones a quarter. But here’s the problem: the cost of smartphones is falling fast. And while they haven’t closed the gap just yet, when iPhones are shipping for $49, featurephone manufacturers are obligated to prepare for a future in which they compete with smartphones. Hence the importance of having a smartphone strategy.

Q: Why Microsoft over Android?
A: Only Microsoft and Nokia can say. Elop cited the challenge of differentiating and the risk of being commoditized (see the analysis here), and that may have played a role. Nokia gained favored nation status amongst hardware providers in the Windows Mobile ecosystem as part of this deal (which raises interesting questions about the participation of other OEMs in future). Google, meanwhile, has been reluctant to advantage one supplier over another, gifting different suppliers with the opportunity to produce the first Google experience devices: HTC (Nexus One), Samsung (Nexus S), Motorola (Xoom), etc.

But ultimately, this likely came down to the best offer. Microsoft needed Nokia more than Google did, and the terms of their deal presumably reflected that. Intel CEO Paul Otellini said as much:

“Between Microsoft and Google [Elop] was getting incredible offers, money, to switch,” Mr. Otellini told investors Thursday. Microsoft bid more, he said.

For all of the talk of differentiation and commoditization, then, they were almost certainly secondary to the financial terms.

Q: Why did Microsoft need Nokia more?
A: Because they are effectively an also-ran at the present time in terms of marketshare. Most of the numbers show anemic adoption of Microsoft’s flagship mobile OS, and this at a time when Android is activating better than 300,000 devices a day and the iPad business by itself is on track to be a Fortune 500 sized revenue stream.

The one thing Microsoft has always been able to offer its developers has been volume. In mobile, they can make no such promises. They’re sufficiently far behind, in fact, that they’ve actually had to pay developers to build for their platform in an effort to prime the pump.

Nokia, meanwhile, for all of its problems, remains a massive center of gravity in the mobile space. This partnership doesn’t cement the relevance of Windows Mobile 7, but it certainly makes it a more attractive target than it was before.

Q: What does this mean for MeeGo?
A: If this is not the nail in the coffin for the project, it’s close. MeeGo has always been a project with hazy prospects [coverage], but with Nokia abandoning the platform it’s unclear who remains to champion it. Intel re-affirmed its commitment following the Microsoft/Nokia press conference, but it’s something of a hollow endorsement considering the lack of either shipping devices or partners to manufacture same. Assuming counterfactually that MeeGo was today competitive with the currently shipping device operating systems, there is the problem of applications: MeeGo has no application catalog to compete with the App Store or Android Market, and that alone calls into question its market viability.

My expectation is that portions of the MeeGo codebase will resurface in other open source projects, as some of the original work around Clutter etc was visually impressive, but that MeeGo is effectively dead.

Q: How about Qt? What is the future for that project?
A: Qt’s prospects are not quite so dim as MeeGo’s following Nokia’s decision, but the toolkit’s fans have found little to cheer about. Senior management at Nokia has promised that Qt will live on, but cites MeeGo and Symbian as the primary instantiations. The writing, in other words, is on the wall and we’re likely to see more Cutehacks in the days ahead. It’s possible, though not likely, that we’ll see Qt/Trolltech spun off from Nokia, but given the limited market for the asset it’s difficult to envision a situation where the proceeds would offset the costs of sale.

Q: We know that Intel is disappointed by Nokia’s actions here, but what does this transaction mean for the chip vendor?
A: Intel suffered two setbacks in this transaction. First, and most obviously, Nokia’s defection from MeeGo likely means the end of that project. Less apparent are the implications from a chip perspective: Windows Mobile at present is ARM only, while Android has been successfully ported to Atom. Nokia’s partnership with Microsoft, then, sections off the Finnish vendor as a potential Atom customer for the time being. That said, Infineon is in a lot of Nokia phones, and as Infineon is now part of Intel, they’ll presumably have to put their differences aside and continue to work together.

This is a setback for Intel, then, but a mild one.

Q: Considering all of the above, do you think this was the right deal for Nokia?
A: Asking whether this was the right move presumes there was one, which I don’t believe to be correct. Nokia is making the best of a bad situation here; whether they’ve made the right decision remains to be seen, but that they had to take drastic action of some sort is not – to my mind – debatable. You can build the case for Android over Windows Mobile 7, and the history would support that case, but until and unless we know the full terms of the deal financially for Nokia it’s impossible to assess the quality of this decision.