Well, I totally disagree with the premise of this article. I believe the partnership between the two companies is brilliant. The problem is that it is starting from zero marketshare and time and patience will be required to make it work. If Nokia is able to convert current Symbian users to WP on the low end and make inroads with the 900 on the high end it has a winning strategy. It sold a million phones in about 6 weeks of availability in very few markets which is a modest start. The staggered rolling out of products to other countries guarantees that they will build momentum in their sales numbers quarter by quarter. The introduction of Win 8, especially on tablets, will further the momentum. Those who thought this was going to be an immediate turnaround are no doubt disappointed, but to me there are slow but sure signs that things are beginning to turn their way…

This article is flawed in so many aspects. I'm going to focus on just one or two small aspects as an example…

The claim that iPhone users are going to choose a Mac as their next computer means fewer Windows license is a flawed claim. Why? Because Macs can also run Windows. Certainly everyone I know who has a Mac also runs Windows on it because for a lot of stuff Windows is better. The Mac hardware is good enough to run both OSX and Windows. If that is indeed a common scenario worldwide, then clearly buying a Mac won't impact on Windows sales as much as the author thinks. But Windows is just one part of Microsoft's huge revenue stream, with the other one being MS Office. Imagine if Office was installed on every iPad…

Recent results show that Nokia has started to make a big impact in terms of Windows Phone gaining traction. The results show that the Nokia marketing has also helped sales of non-Nokia WP7 phones. So it's becoming clear that the partnership could very well turn things around, especially for markets outside the USA.

To echo the comments above, Nokia indeed has a good strategy and we're in the early stages of intense worldwide execution. It's too early to dismiss the viability of a third ecosystem, which will float a lot of boats — and we intend to have the best boat.

Gary554, this post starts honest discussion on the future of the partnership, so I guess it's natural to have disagreements…

Together with that, will be good to know why do you disagree with the premise of the article, which is Microsoft and Nokia cannot win by combining two outdated business models. Your response does not address that.

To succeed Nokia must achieve profitable growth. Just growth, or just profitability won't cut. You argue that Nokia eventually after long time may achieve some growth, but expecting long-term profitability in present market conditions is wishful thinking to say the least.

WP7,

Well, saying that Mac sales do not impact Windows sales is ignoring facts – Just look at recent earning reports of all PC players, including Microsoft (there is a link in the article for your convenience). If the numbers in the earning reports are not convincing enough – look around. You'll see more and more people around you, from the US to Russia and China are using Macs. Transition from Windows to Mac is much easier today – most of the apps today are web apps running equally well in Safari or Chrome browsers. Even those who use Outlook/Office can get a decent Mac version from Microsoft itself.

As for "Recent results show that Nokia has started to make a big impact in terms of Windows Phone gaining traction", Nokia's goal as a business is not help Windows Phone to get traction, but bring value to its shareholders, i.e. profitable growth. See the reply above. It's really simple.

John@Nokia, 3rd ecosystem may indeed float lot of boats. The question is whether it will be Microsoft, Nokia or somebody else.

Nokia is insisting on fighting three year old war, which it just cannot win – the industry has moved on to new challenges and new basis for competition. Samsung and fast-moving assemblers are much better equipped for the new market conditions than Nokia, who's traditional strengths are much less effective now. The wind has changed and just being afloat won't get you far unless your sails are set properly…..

An important point missing from this article is that Microsoft has a good ecosystem (however under utilized) and Google / Android does not. Sure, Google has Google Music and Picasa web albums, but its far from seamless or complete.

The Microsoft ecosystem is arguably the best with enterprise grade security, MS Office, music, everything + Nokia's exceptional hardware and channel access.

I think both Google and Apple need to worry about this new kid on the block!

Very disappointed that Vic Gundotra's spiteful sentiment has made its way into an even-keeled publication.

"But, Windows Phone is a “loss leader”, not a growth engine. "

Wouldn't you have to say the same thing about Android?

When I venture outside, what people use around me are tablets, not Macs. I see very few Macs when I look around. Those using laptops are mainly Windows 7 PC laptops.

Sales of Windows licenses may be affected by tablets like iPad, but they won't be affected by the number of Macs, which is a tiny proportion of both Windows PC sales and iPad sales.

Really good article. My only question regards the final statement?

"As it seems, the only way out for Nokia and Microsoft would be the acquisition of Nokia’s smartphone business by Microsoft, as Andreas Constantinou predicted a year ago on this blog."

This might give Nokia an exit strategy but why does it fix Microsoft's problems?

What about the idea of having a better OS. Clearly iOS, while polished well, is aging and looks dated. Android is changing, but changing too much.

While WP, I believe, is the best OS out there. What does that count for?

Luke, yes Microsoft has lots of assets it could use. Google's service ecosystem however is improving steadily.

dave55, you are absolutely right – it won't fix Microsoft's problems, but it will allow Microsoft to sustain a mobile play using model similar to Xbox. Xbox is successful in terms of console market share, not so in terms of profits it brings to the company bottom line.

"Better OS" is only one piece of the puzzle. Without winning over developers, an OS cannot win over users. Without profitable business model, it is impossible to sustain huge investments necessary for running ecosystem and advancing the OS. Ask Apple 20 years ago about "better Mac OS". Ask IBM about "better OS/2". Ask Palm about "better WebOS". Ask Nokia about "better MeeGo"… We'll see few more examples of new "better OS" in the coming years.

Right. Two turkeys will make an eagle. The problem Nokia and MS have is that they have no time. They had time when they defined/created smartphone market but then sat on it. Now the ecosystem has moved off. In disruptive innovations there are usually only 1 or max 2 winners..so this is a game between iOS and Android..sorry

"Microsoft’s mobile strategy is about reducing ecosystem churn, i.e. protecting revenues from Windows and Office licensing."

- "reducing churn" is the same as building the ecosystem, which is what you are advocating. So how is this a negative?
- "protecting revenues". MS has announced that Office 15 will be free on tablets. How is this revenue protection?

"Nokia’s real competition is not iPhone or Android, but Samsung."

Oddly, Apple makes neither the screen, the glass not the chips. Does not seem to have hurt their profitability. How does the race to the bottom make for a good strategy? Maybe one could ask HTC.

"Nokia’s business model of high-margin, branded OEM is in question and its dependency on Windows Phone alone is a weakness."

So you are advocating they spend more money on development (2 OS's) and weaken their ecosystem further by confusing developers as to which OS they will support? I fail to see how this is a viable strategy.

"Nokia will have to compete on price with Android devices."

Firstly, most Android OEMs have to pay an MS tax, so that advantage goes away.
Secondly, most of same OEMs make shoddy hardware (poor fitting, plasticky feel, no ID to speak of) with an OS that is poorly upgraded (if ever). This surely cannot be hard to beat!

Michael,
You've made some great points but one important aspect that you have ignored is the mobile operator side of things.
Mobile operators need a third ecosystem to balance the power of Google and Apple and as it stands, WP7 is only credible choice they have (up until HTML 5 takes off in a big way).
Mobile operator support could underpin the success of this ecosystem.

Gundotra was quoting ex Nokia-VP Anssi Vanjoki, who used the phrase when asked to comment on the acquisition of Siemens mobile phone division by BenQ back in 2005.

Good analysis!

Adds a bit of business rationale and reality to the article in the MWC2012 (Feb) issue of Comms Business on mobile device platforms. http://bit.ly/CommsBus-MWC2012.
See the "Leaders and Laggards" analysis.

@ Michael. Your problem here is that you totally and utterly believe what you write is true. Your answers to the comments posted do not take on board any of the great feedback. How about opening your mind a bit to the possibility that MSFT & Nokia might actually pull it off – and that this race still has a long way to run.

12 years after the formation of Symbian – when every other OS has gone to the wall MSFT still have a Mobile OS. Granted it has been through several name changes but they're still going. They have staying power greater than Ron Jeremy and given their deep pockets and their ecosystem you can never write them off.

While i agree that Nokia and Microsoft are very late to the party, their are some points that i disagree with..

Firstly on Samsung, yes they are very very fast and profitable however the questions are about how sustainable this is. Samsung seems to have a problem in that they are expanding their product lines into so many products that they are going to confuse customers, eg the Galaxy Tab 7 Plus – is very very very similar to the new Galaxy Tab 7-2 so much so that the normal user will not know the difference. They will end up buying one or the other but the issue is how are Samsung going to improve the experience of their devices abduction deliver timely updates when there are so many devices. Yes hardware differentiation is needed abduction great but it makes giving a smooth consistent experience harder. even Samsungs naming scheme is confusing consumers! Then when you look at Android it self, yes ICS is great but the problem is the less than perfect experience customers had regarding performance and battery life on Android 2.2 and below are driving them to look for a better OS experience that WP can provide on Good Nokia hardware.
Their is also the war on Android being waged by Apple, where it seems that every day more law suits are taken up, while the patents are lame and in my opinion call for FRAND software standard patent law, all this is affecting the alure of android to OEMs making WP look even better.There is also the matter of the quality of Software that Samsung has put over Android that doesn't seem to provide an experience as pleasing as the current WP apps for example Samsung Apps which looks as if it is still developed by a part time developer to just function but look ugly. I say this as I type this on my Galaxy Note, which I love but is far from perfect.

All these cracks in Android can be addressed quite quickly, and i believe Samsungs issues can be fixed even quicker, but as they are they present an opportunity for Microsoft and Nokia to carve out a reasonable size of the market for them selves.

You are very right on the fact that operators need more ecosystems to balance things out… I know US operators play an important role in device distribution in their home market, but how important is the operator device distribution power on a global level? How large percentage of the total handset turnover in a year is sourced through operators? Anyone know?

Today these players own the eco system with developers/customer locked in because of fragmentation etc.

But with new standards like HTML5 and new cross platform tools it will be a different game.
Then we end up with a much more dynamic ecosystem. Who cares what brand it is on the hardware or OS as long as it does the job in a way you like.

Mac grows faster that PC sales – what does it tell you about Windows licenses?

Shamal,

You are raising lots of points – seems typing is easy on your Galaxy Note…. ;^)

Google doesn't need Android to be perfect. It needs to be good enough to win large market share. To that extend it does the job quite well. Samsung is doing good, too, despite the issues you're pointing out. They should be doing something right.

Gyanee,

Good point, but there are limitations on how much stuff can be in one post. Operators certainly play an important role. I'm afraid that the strategy of competing with iOS and Android head to head (i.e. by fostering a better competing ecosystem) will be an uphill battle they are ill- equipped for. There are much better approaches.

Since it's all about subsidies, it depends on the penetration of post-paid plans. Western markets are dominated by post-paid, while such markets as Latin America, Russia and China are dominated by pre-paid plans.

HTML5 will need some time to establish itself. It will not happen tomorrow and may end up working out very differently form what many ecosystem players are hoping for.

Win 8 tablets and WP8 Apollo + Tango will make both Microsoft and Nokia climb a lot until the end of 2012. WP is selling pretty good in the western Europe where it was launched first … just check the web usage stats.

It tells that MAC hardware is very popular. Like the OP observed before, MAC hardware can also run windows. Like him, I also see a lot of MAC users installing windows alongside OSX. So MAC sales does not necessarily mean less sale of Windows licences.

Also, you have not considered the possibility of Ultrabooks gaining prominence. Granted they have their quirkes now (high price for instance), but they can (and will be) addressed in the near future.

It's incomprehensible how someone positioned as an analyst can be walking around with such fundamentally wrong facts, let alone a lazy and flimsy analysis. Nokia, even now, is the world's largest phone maker, period. Only with complete blinders can anyone keep such a US-focused gaze, spending a blog post on the same tired iPhone/Android "dominance" arguments.

Gary,

I share your optimism – and I think that the Lumia phone is the biggest innovation the mobile industry has seen since 2007 and the iPhone.

At the same time, I share Michael's pessimism which takes an economic perspective. Nokia and Microsoft's business models, i.e. making money from hardware and software licensing, respectively, used to work in the 1990s and 2000's, but not in the age of assemblers and fast followers (2010's).

Andreas

TJW,

The article does not endorse Vic Gundotra's spiteful comment. It says that it might indeed turn out true, although for reasons that Vic was not considering (after all Google was also bidding for Nokia's smartphone business before it lost to Microsoft – and so Google would be partnering with a turkey equally if it had won).

For the low-down on Vic's comment and the dangerously closed nature of the Google ecosystem, see the earlier post we published here: One cuckoo, two turkeys and three horses; how the mobile race has changed.

jimbochicago, we live in a world where diversity of opinions is celebrated and debate is encouraged. Nokia and Microsoft can only win from such an open debate.

You're welcomed to point out where are the facts with which I've been so fundamentally wrong. Venting emotions on someone who disagrees with you won't take us far.

Tim,

Microsoft's primary goal for WP7 is not to make licensing revenues (that business model is outdated), but to protect its Windows and Office licenses from users churning to iDevices. So "reducing churn" refers to reducing firstly user churn I believe.

Re: Office 15: It might be free on tablets, which is again aiming to entice users away from iDevices. However, MSFT's Office revenues are on desktop, not tablets.

Re: dependency on Microsoft alone: any single-supplier dependence is indeed a weakness. But it's a catch-22. Backing any off-the-shelf platform will inevitably have Nokia compete with assemblers (Huawei) and fast-followers (Samsung).

Re: beating shoddy Android hardware: users will not just pay for better plastics and ID. It's a point of differentiation, but not sufficient to warrant better profit margins.

Hi Martin,

Michael's analysis is based on an economic analysis of Nokia's and Microsoft's revenue models and profit sources.

What the article is saying is that even if MSFT and Nokia "pull it off" by generating a substantial amount of device sales (or number of apps), that will not directly translate into Nokia profits, since the primary differentiator amongst modern smartphones is price, and Nokia will have to play by the same rules.

Like Michael says "the basis for competition has changed". This is nothing new – it's applying Clayton Christensen's Innovator's Dilemma on the mobile handset market.

DanT – I only hope you 're right. The mobile handset industry needs a third contender to the duopoly.

Which exactly are the "fundamentally wrong facts" ?

Nokia is the world's largest phone maker, agreed. But do you remember the time Nokia was the world's largest smartphone maker? Not too long ago, Symbian used to have more than 70% of smartphone market share. That is going to go to zero in the next year (they only have one more model to launch).

WP7 can help revive Nokia's smartphone business, but it's simply not about turning Symbian sales into WP7 sales. It's about competing for price in an Android-dominated market.

I 'm a big Lumia fan, but at the same time I cannot refute the economic soundness of the arguments presented in the article.

I agree!

I really join reading this great analysis and the comments, but lets be realistic people: nokia + symbian sucks! The innovation comes from apple and google and their software ecosystem, somethig that microsoft doesnt have yet.

@andreascon,

Actually MS tried to "defend" their business with WinCE and then WinMo with disastrous results. So really the goal of WP7 was to make a really good UI and OS from scratch, for which they did a nice job.

You could say this is still defensive, but I disagree. Metro is the thin edge of the wedge to Win8 and of course WP8. This is in fact MS response to an alternative UI and UX to iOS/Android as well as their traditional Start.

The jury is out if this transition will work, or if this will be viewed as schizophrenic, but at least MS is taking a risk.

My point on Office 15 is that this is no longer about protecting revenues, they are going on the offense. And if sacrificing revenues is in the game, so be it.

In fact I would point you to the rumor that Office is coming on iOS (with "hints" of Metro). This I am quite sure of, and again shows MS willingness to change the game.

The build quality, which in my view is only matched by Apple, is still a key difference. My point is that if the OS can be better than Android (my recently upgraded stock Samsung Captivate has started giving kernel errors, this with ATT authorized firmware) you have a winning strategy.

The real irony is that in the days of the WinTel duopoly, "good enough" was in fact good enough as there was no alternative. Now if Google thinks they can get away with "good enough", I think they have a surprise waiting.

I read your article and all the following posts. My comments:

1. Microsoft has a viable business model. Licensing operating systems is a spectacular business and gives Microsoft an incentive to better the Windows Phone operating system and foster the ecosystem in the long term and also gives phone buyers a wide, affordable and possibly innovative variety of hardware to choose from, because the manufacturers compete for marketshare based on hardware and price. Android does not have this clear profit incentive and iOS does not have the variety of hardware. Windows Phone has both.

2. Your analysis about "reducing ecosystem churn" is almost right, but Microsoft surely knows that desktop and laptop sales are declining in the consumer segment while tablet and smartphone sales are growing. Microsoft surely also knows that it will always reign supreme in the enterprise segment, because businesses will buy highly productive desktops, laptops and business solutions. Instead, Microsoft wants to capture the consumer segment where it has next to zero marketshare in tablet and phone operating systems. Thus, in order to gain license fees and stay relevant in the consumer segment, Windows Phone 8 and Windows 8 are needed. Otherwise Windows becomes just an enterprise operating system.

3. Nokia’s business model of high-margin, branded OEM is in question, that's true as it's not likely going to command as high margins on its products as before, but does it have to in order to succeed? Also, Nokia's products are not going to become commoditized, at least not in the short term. The Windows Phone strategy avoids Nokia products becoming commoditized, because there are three major competing operating systems and associated ecosystems. It's a war of ecosystems, not devices. But, Nokia could become generic inside the Windows Phone market segment, but it can compete on other aspects than price: Nokia can differentiate its products for example by brand, design and certain unique apps. Also, it's going to be the biggest manufacturer of Windows Phones and this kicks in economies of scale, that together with a strong and well-known brand drives the margins up. Vertical integration has also cons. It does not make sense that Nokia should manufacture Android phones also – they want to kill Android with Windows Phone that differentiates Nokia and gives better margins. Android should not be a part of Nokia's strategy.

4. Microsoft and Nokia both have great assets and a strong will to succeed in their strategic partnership. The Windows Phone operating system is excellent, Microsoft's development tools are world-class and Steve Ballmer knows the importance of "Developers, developers, developers!". The number of apps is growing and it will grow exponentially, because Nokia is committed to Windows Phone, but also because Windows Phone will offer support for native code and by Windows Phone 8 porting of apps between Windows 8 and it will be made easy. Windows 8 will give traction to Windows Phone. The number of apps will explode. Also, Windows Phone includes Navteq maps and navigation, Office, Bing, Zune and Xbox Live out of the box. Nokia is an efficient manufacturing and global distribution machine of phones. Windows Phone is a distribution platform for apps, games and entertainment for developers.

An excellent combination of Nokia hardware and Microsoft software, design and functionality of the operating system, traction from the larger Windows ecosystem and integration possibilities, strong brands of Microsoft, Nokia, Windows and software involved, economies of scale in manufacturing, wide reach in distribution, world-class development tools, fastest growing app store, other manufacturers in the ecosystem etc. will guarantee success to both companies.