Nokia + Microsoft: An Analysis of the Strategic Alliance

I was flying home from Denver the morning that Nokia and Microsoft announced their strategic partnership to focus on Windows Phone as the smart phone platform and ecosystem for both companies. Ideally, with plane-based Wi-Fi, I could have watched the press conference en route, but that wasn't possible so I downloaded the video when I got home and watched it all the way through. Now, stepping through a second take on this announcement, I'd like to offer up some thoughts about what this means, and how I think this will impact Windows Phone going forward.

To be clear, Windows Phone is the most innovative smart phone platform on the market today, and by a wide margin. The iPhone was certainly innovative when it was first announced four years ago, but today's iPhones are simply evolutions of the first, and not different at all from a user experience perspective. Android? Please. Google doesn't have an innovative bone in its corporate body, and Android is simply a cash-fueled power grab, one that is devoid of class or unique thought. But Windows Phone? Windows Phone is special.

Sadly, Windows Phone has also been sitting, unchanged, since its October launch. And this is a problem because Windows Phone launched earlier than was ideal, given the unfinished and somewhat buggy state of the product. This wouldn't be a problem, I thought, because Microsoft had pledged to update Windows Phone rapidly, emulating what Apple did during the first year of the iPhone, and to add features and be transparent about its plans, as Apple has done all along. Neither has happened, and my sources tell me that the first mega-patch for Windows Phone has sat undeployed on Microsoft's servers because the software giant's wireless carrier partners--contrary to another unfulfilled promise--have refused to OK it for release.

And so walking into the Nokia strategy announcement this past week, I was of mixed minds about Windows Phone. On the one hand, we have the most innovative smart phone platform on the planet. But on the other, we have a platform that has likewise been left sitting, unchanged, since its launch four months ago. Love/hate doesn't even begin to describe this relationship.

So how does the addition of Nokia change things for Windows Phone? With the understanding that there are still plenty of unanswered questions, let's examine the strategic partnership announcement and see if there are any clues.

Stephen Elop, the president and CEO of Nokia and, it should be noted, a former Microsoft executive who just last year ushered Office 2010 to market, got to the point very quickly. "The game has changed \[in the smart phone market\]," he said, "from a battle of devices to a war of ecosystems."

This is a very important and correct point, and it should be noted that by ecosystems, Elop is of course referring not just to the underlying technology platform on which smart phones (like PCs or servers) are built, but also on all the surrounding services and add-ons that complete that platform. Today's best smart phone platforms don't stand alone, they're supported by online stores that offer apps, digital media content, and other services, over-the-air, where and when users want them. Looked at from an ecosystem perspective, there is the iPhone, and then there is Android. And then there is everything else.

(The Windows Phone ecosystem, like the platform itself, needs to mature, and improve, and desperately so in some cases. That is, there are holes, big holes, including such things as the inability to download and update podcasts over the air, the inability to rent movies or purchase TV shows on the go using just the device, and so on. Even basic things like Marketplace search don't work correctly on Windows Phone.)

With that, Elop announced what many had anticipated: A partnership with Microsoft on Windows Phone. Here's how he worded it: "Nokia and Microsoft intend to enter into a strategic alliance, subject to the completion of a definitive agreement. Together, we have the opportunity to disrupt the current trajectory in the battle of ecosystems. We have a formidable plan to ensure our collective leadership in the smart phone market and in the ecosystem that surrounds it."

A couple of points here.

By "current trajectory," Elop is of course referring to a presumed future where there is Android and iPhone, in that order, and then everything else. And certainly, that is where the market is heading. I think the smart phone market could be diverse enough to support three or four players, but there's little doubt that all the action today is happening in the Android and iPhone spaces.

As for leadership, it would be irresponsible not to be point out that neither Microsoft nor Nokia have been showing any form of leadership in the smart phone market. Microsoft's tired previous mobile OS, is the object of ridicule, as it should be, and Nokia simply stopped innovating in the face of Apple and is now watching its once-dominant market position crumble readily. How these two "turkeys"--as Google VP Vic Gundrota has called them--can combine their feeble attempts at leadership into a winner, of course, remains unclear. And honestly, there was little in this week's announcement to suggest that a simple merging of their resources would get them there.

"Together, \[Nokia and Microsoft\] will deliver great mobile products," he continued. "Hardware. Software. Services. Applications. And customer support. This ecosystem will be inclusive of chipset providers, hardware manufacturers, software providers, services partners, the application developers, providers of development tools, and of course the operators."

Right. That's what an ecosystem is. But the only major change between what Elop described and what was the case with Windows Phone previously is that he's claiming that Microsoft will essentially collaborate with Nokia on hardware. Today, Microsoft has created a set of hardware reference designs that its hardware partners have used to create their own devices. These current devices differ little from each other in the sense that they share more commonalities than true differentiators. But the Nokia alliance threatens to undermine this, with Nokia becoming a "favored" partner with a presumed closer relationship with Microsoft.

Put another way, Nokia--alone of all Windows Phone partners--is dropping its current smart phone platform(s) and will focus solely on Windows Phone. Microsoft's other hardware partners are making Windows Phones, sure, but they are more heavily focused, and obviously so, on Android. It's possible that the Nokia entry will push some of these other partners over the edge, causing them to drop their Windows Phone models all together.

Of course, for any strategic alliance to work, both companies need to offer something that the other does not have. And according to Elop, this is exactly why the Nokia/Microsoft partnership makes sense. "Together, we have highly complementary assets and competences, allowing this ecosystem to achieve more than any other industry partnership could achieve."

Elop said that Nokia would bring its "tremendous" brand, great mobile \[hardware\] products, global reach, its applications store (Ovi, which is actually being discontinued and integrated in Windows Phone Marketplace), and maps and location assets to the party.

Microsoft, meanwhile, has a "great software platform" in Windows Phone, and the brands that mobile consumers want, "like Bing, Xbox LIVE, and Office." (Side-note: Zune was conspicuously absent from this list. It is my opinion and guess that Microsoft is currently phasing out the Zune brand and will simply roll the various Zune services into Windows Live.) The combination of these assets, Elop noted, has "unrivaled global scale."

Interestingly, Elop referred to Microsoft combining its "next-generation software platform" with Nokia devices, which was the start of a timeline discussion that eventually led to Elop admitting that Nokia wouldn't be moving ahead full-steam with Windows Phone devices until sometime in 2012. This leads me to guess that Nokia's first Windows Phone devices will in fact be based on the "Mango" version of Windows Phone, which is due in roughly October 2011, or GA + 1 (one year after the general availability of the initial Windows Phone version). Put another way, Mango is Windows Phone v2, or the first truly "finished" version of the OS. It's relevant, too, that Elop never referred to Windows Phone as "Windows Phone 7," i.e. the current version. He just called it Windows Phone.

"Nokia will adopt Windows Phone as our primary smart phone strategy," he stated. "We will help drive the future of the platform, bringing expertise on hardware optimization, language support, and software customization. We will bring Windows Phone to extended price points, market segments, and geographies. The joint product roadmap will give consumers a near-exhaustive portfolio of established products and services, including things like location services, search, entertainment, social, advertising, eCommerce, and a variety of others."

Woah.

There's a lot of info to digest in that series of sentences.

Nokia isn't just partnering with Microsoft. It is collaborating with Microsoft on the future of the software platform too. This could and should lead to an even tighter integration between the Windows Phone OS and (Nokia) hardware.

Nokia is going to help improve Windows Phone's support for multiple languages, which is desperately needed.

And Nokia is going to drive Windows Phone down into new markets. Currently, Windows Phone 7 is marketed and sold as a high-end, almost luxury smart phone brand. But in the future, this system will be brought down market and opened up to a wider range of users. This could lead to fragmentation at the expense of market share.

But the big bit in there, for me, was the notion of a "joint roadmap." This is not just a plan both companies agree to, it is something that will "give consumers" an understanding of the breadth and depth of what's happening with Windows Phone. This is huge, and is exactly what Microsoft is not doing today with Windows Phone: Being transparent. I hope I'm hearing this correctly. If I could change anything about Windows Phone, that would be my choice: Microsoft needs to open up about its plans and provide plan updates on a very regular basis. Today, we get a wall of silence.

Elop then explained why this partnership was good for Nokia. Frankly, that's the least interesting part of this discussion as far as I'm concerned. One has to assume that Nokia would never have entered into this agreement if it didn't feel there was a benefit. Likewise, this agreement is also good for Microsoft for obvious reasons. A corporate "win-win" is a desirable if illusory goal, since one of these companies will almost certainly benefit more than the other, or even instead of the other. But time will tell the tale here. There's no reason to beat the obvious to death.

Microsoft CEO Steve Ballmer then joined Elop on stage and discussed the unveiling of the platform a year earlier and the launch more months ago. He said that Windows Phone was not just a single product but was instead the combination of many products from across Microsoft, "not only Windows, but Office, Bing, Hotmail, and Xbox." (Note, again, how Zune was conspicuously left out of this equation.) Ballmer then discussed the integration of third party services--though there isn't really much of this at all in Windows Phone, and certainly none have been added since the launch--and talked up the developer opportunities on the platform.

So why team up with Nokia? "We do dream bigger though," he said. "More innovation, greater global reach, and more scale ... The partnership with Nokia will dramatically accelerate the development of a vibrant, strong Windows Phone ecosystem.

He admitted that because Nokia will focus almost exclusively on Windows Phone hardware and services, Microsoft would work with them "in a different way" (presumably compared to how it works with other Windows Phone device partners) to "drive innovation on the Windows Phone platform." He did, however, specifically state that Nokia would only be part of the Windows Phone hardware ecosystem, so Microsoft apparently expects to continue working with existing partners. In other words, while this is certainly a unique partnership, it isn't an exclusive arrangement.

Ballmer said that Nokia will work with Microsoft to "push hardware advances" that will apply to new versions of the base Windows Phone platform spec. But Nokia will also do its own unique hardware advances--and software services--that will help the company differentiate its products from competitors (which are other Microsoft partners). So this isn't like open source. Not everything Nokia does is being driven into the core platform. Nokia-based Windows Phones will instead be a superset of the basic Windows Phone experience. This is true of all phone makers, it's just that Nokia is all channeling some changes back into the core product too.

Only a few of these changes were mentioned specifically. Nokia map and location technology will find its way into Bing search. Nokia's imaging (camera) technologies will be used to improve the picture taking and processing capabilities of Windows Phone. More vaguely, Nokia will contribute to "local advertising," presumably in those international markets where it's brand is well established.

Whatever the details, Microsoft and Nokia will collaborate quite closely on development, joint marketing initiatives, and a shared Windows Phone roadmap. In fact, Ballmer said that Microsoft and Nokia were already working together to create the first Nokia Windows Phone.

Amazingly, the entire announcement took less than 13:00 minutes. What followed was the typical Q & A session, in that most of the questions had been either answered during the actual announcement or was so obvious it didn't need asking. (You gotta love the press.) I don't care about the future of Meego, for example. But that said, a few interesting and relevant tidbits did emerge:

When? There was "no specific announcement" around when the first Nokia Windows Phone would appear in the market. However, Elop noted that Nokia would be able to move faster than ever before in introducing handsets now that it has decided on Windows Phone.

Why not Android? Elop said Nokia had three options: Adopt Windows Phone, adopt Android, or continue down the same path (keep working on Symbian/Meego). The latter option was a non-starter because it was already not working. Nokia discussed Android with Google, but found that it would have difficulty differentiating within the Android ecosystem. "The commoditization risk was very high," he said. "Prices, profits, everything would be pushed down, \[and the\] value would be moved out to Google essentially." Windows Phone was the best opportunity "to build and lead and fight," plus Microsoft and Nokia have "tremendously complementary assets" (as was previously discussed).

Nokia is paying to use Windows Phone. Windows Phone is a "royalty bearing product," i.e. one for which partners must pay for licenses, but Microsoft will be using a lot of Nokia technology too. If I understand Elop's careful dance around this issue, both companies are, in effect, paying each other something. It's possibly a wash, but I'd bet that Nokia is paying more than Microsoft and is thus, in effect, paying Microsoft.

Tablet strategy. Elop noted that Nokia's relationship with Microsoft gives it "different options" with regards to creating a tablet computing device. Microsoft, of course, is pursuing Windows 8-based tablets, which won't appear until late 2012 at the earliest, and not Windows Phone-based tablets. Basically, neither company was willing to announce anything.

OK, so what's the end game here? With the understanding that I care less about the future of Nokia than I do about the future of Windows Phone, this is a win for Microsoft and its new smart phone platform. It picks up a major new collaborative partner, the first (among hardware partners) that will not be competing with Microsoft on the side with Android products. Nokia will contribute software and services to the Windows Phone platform, and dramatically expand the reach of this platform worldwide. This is nothing but a good thing.

Will this change the competitive matrix much with regards to Android and iPhone? Perhaps, perhaps not. But like Elop, I take umbrage at Google VP Vic Gundrota's "two turkeys" comment. Windows Phone is the most innovative smart phone platform on earth. Hopefully adding Nokia to the mix will only make it better. My guess is that it will.