Nokia/Microsoft alliance carries downside for cell phone giant

EL SEGUNDO, USA: Nokia Corp.’s agreement with Microsoft Corp. to make Windows Phone 7 its principal operating system is likely to have a negative near-term impact on the mobile handset leader’s smart phone shipments.

With the announcement of the deal, Nokia is eliminating any incentive for consumers and developers to buy into its existing smart phone products, which are based on its Symbian and MeeGo operating systems.

With the Microsoft deal unlikely to yield any products for nearly one year, Nokia will have no choice except to remain awkwardly reliant on the Symbian and MeeGo platforms in 2011. This will have a further negative impact on the Nokia’s already eroding position in smart phones.

The Microsoft deal also could have negative implications for Nokia’s smart phone business during the long term. Unrelated to this news, IHS recently cut its Nokia shipment forecast significantly during every year through 2014. Although Nokia’s immediate prospects are definitely negative, the longer-term implication of the deal is to add uncertainty to Nokia’s overall outlook. This forebodes ill for Nokia, which doesn’t need additional doubt in its story as it strives to maintain consumer and developer interest.

With the news, Nokia issued new guidance for its smart phone sales, saying that 2011 and 2012 will be transition years but that it will grow faster than the market thereafter. Nokia said it still expects to sell 150 more million Symbian devices in years to come, giving an indication of how it expects the Phone 7 handoff to work. IHS now forecasts that Nokia will ship 122 million smart phones in 2011. Assuming Nokia’s internal forecast is similar to ours, Nokia’s Symbian sales guidance implies the Windows Phone 7 transition will occur in early 2012, although a Phone 7 model is likely to arrive before the end of 2011.

Nokia’s Intel Corp. relationship, which centers of the MeeGo operating system, has taken a serious beating with the Microsoft agreement. Nokia said it still expects to ship a MeeGo-based smart phone later this year. However, it’s difficult not to view the Microsoft deal as anything other than an abandonment of MeeGo.

If Nokia wanted to leave mobile operating system development to another company, IHS thinks Google Inc. and its Android software would have been a better choice. Nokia could have reaped many of the benefits it expects with the Microsoft relationship from either Google or Microsoft. But clearly, the unspecified billions in Microsoft cash payments were an important motivating factor in entering into the deal.

Source: IHS iSuppli, USA.