Why the Nokia-Microsoft Smartphone Deal is Doomed

Apple and Android are just too powerful

By Jeff Reeves, Executive Editor of InvestorPlace.com


Nokia and Microsoft announced a deal to partner on smartphone sales, hoping to take on the iPhone from Apple and Android phones from Google. Unfortunately, the Nokia and Microsoft smart phone alliance is doomed and will likely never topple Android or the Apple iPhone.

Nokia (NYSE: NOK) was once the king of cell phones, at one time garnering as much as half of the mobile phone market. But as the devices got smarter, Nokia has found itself left behind. Nowadays, every gain for the iPhone and Android-powered gadgets is one more body blow to the Finland-based electronics firm which has slowly and steadily been losing global market share.

The company is hoping to change its fate, however, by teaming up with another tech powerhouse left out in the cold when it comes to the mobile market – Microsoft (NASDAQ: MSFT). In an announcement today, the companies announced a partnership to create compelling devices with great apps that run on a mobile Windows OS and thus strike back against iPhones and Droids everywhere.

Will the strategy work? In two words, “fat chance.”

First, let’s admit that the partnership is just about the best thing either company can hope for at this stage in the game. Microsoft garners a just a few measly percentage points of the smartphone market with its Windows Phone 7 operating system and needs a big leg up if it plans to compete with the open-source Android software from Google (NASDAQ: GOOG) let alone Apple (NASDAQ: AAPL) and its juggernaut the iPhone. Teaming up with Nokia, which while flagging still cranks out 5 to 10 million smartphones a month,will give MSFT a grand stage to showcase its software and try to make an impact.

As for Nokia, the company is certainly not on the edge of bankruptcy thanks to these brisk sales. It is a massive corporation with $56 billion in annual revenue, and is soundly profitable. However, it’s worth noting that before the recession and before Android came on the scene, the company pulled in $74 billion in revenue for fiscal 2008.  The writing is on the wall – and actually has been written there by the company leadership itself.  Reports of a memo from the new CEO (an old Microsoft exec) equated Nokia’s position to a burning platform in the middle of the arctic ocean. You either burn alive or you steel yourself for a plunge into the icy water below. Nokia is taking the plunge with MSFT, before it’s current 31% share of the smartphone market dwindles to zero.

But the fundamental flaw with this deal is not a lack of will or resources at Nokia and Microsoft. The partnership makes a lot of sense on paper, and may actually be a more legitimate threat to Apple and Android then also-ran one-time innovator and current also-ran BlackBerry. But the problem is that there just isn’t enough room for three horses in this race – so whether Nokia is a legitimate third alternative, the bottom line is that #3 is as good as being #13.

Research in Motion (NASDAQ: RIMM) and the BlackBerry is your case study. Many think the smartphone pie is clearly in Apple’s hands, and as the company gobbles up the sales there will be room for only one runner-up to pick up the scraps. Google has shouldered BlackBerry maker Research in Motion to the sidelines as it burst onto the scene – with Android catapulting from a 4% share to a 23% share in 2010. But how much did Android steal from Apple? Zero. What it gained almost wholly came from Research in Motion’s BlackBerry, and other smartphone bottom feeders that couldn’t compete with Apple.

In short, unless Nokia-Microsoft can knock Apple or Google off their perch — which is highly unlikely — the company will have to content itself to nibbling on the crumbs left over as the two tech powerhouses gobble up nearly all the smartphone pie. Barring the release of a groundbreaking phone with substantially better apps, something all but impossible considering the head-start Apple and Android have with software developers and consumers alike, this fate is a foregone conclusion.

Teaming up may allow the companies to cling to the mobile market for a few more years, but make no mistake – the partnership won’t give Nokia or Microsoft a seat at the table. The best they can hope for is to get a bigger share of the crumbs and be the last to see their smartphone business starve to death.

Jeff Reeves is editor of InvestorPlace.com. Follow him on Twitter via @JeffReevesIP.

Article printed from InvestorPlace Media, https://investorplace.com/2011/02/nokia-microsoft-smartphone-iphone-android-goog-aapl-nok-msft-rimm/.

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