Nokia and Microsoft form partnership

Nokia and Microsoft teamed up to build an iPhone killer on Friday in a desperate attempt to take on Google and Apple in the fast-growing smartphone market.

In a strategic u-turn, Nokia said it would use Microsoft’s Windows Phone as the software platform for its smartphones, the main plank of new chief executive Stephen Elop’s overhaul of the world’s biggest cellphone maker.

“It’s now a three-horse race,” Elop said in a statement.

Investors were not convinced by Elop’s eagerly anticipated strategy announcement and shares in Nokia tumbled more than 11 percent as the market reacted to Nokia’s saying that 2011 and 2012 would be “transition years” as it built up the partnership.

The deal would have a negative impact on Nokia’s margins in the short-term, analysts said. Nokia said its operating margin would be “10 percent or more” after the transition period.

“They’ve announced a big tie-up with Microsoft but at the same time they haven’t cut R&D. Given that the people who were positive on the stock were looking for mid-teens devices margins by 2012, we can see some cuts to estimates,” Richard Windsor, global technology strategist at Nomura said.

The partnership marks a major breakthrough for Microsoft which has struggled for years to establish itself in wireless.

Its Windows Phone platform, which had a 2 percent market share in the last quarter, is widely recognised by industry experts as a leading edge technology but has not yet gained success among consumers.

The decision to throw its lot in with Nokia could put others off using its software, but analysts said that on balance it was Microsoft that would gain most from the deal.

“I don’t see LG, Samsung, HTC carrying on with Windows Phone. They’re betting everything on (Google’s) Android. Nokia’s obviously going to have a much deeper integration than the others,” Carolina Milanesi, handsets analyst at IT research firm Gartner, told Reuters.

Fear Factor

“This is a partnership born out of both parties’ fear of marginalisation at the hands of Apple and Google but there is no silver bullet,” said analyst Geoff Blaber from CCS Insight.

Nokia has rapidly lost share in the higher-margin smartphone market to Apple’s iPhone, and products based on Google’s Android platform, which claimed the top spot from the company last quarter.

In a bid to stem Nokia’s losses, Chairman Jorma Ollila brought Elop in from Microsoft last September. The 47-year-old is the first non-Finn to head the company.

Nokia said in a statement it would stick with its current management team, with only one senior executive to leave. There had been speculation of a wider cull at the company.

Nokia also said it would use Microsoft’s Bing search engine across its cellphones, potentially opening up a huge market for Microsoft as it seeks to build up its challenge to Google as the world’s leading search engine.

Analysts said the Finnish company, which invested billions of dollars in building up mobile internet services under its previous CEO, had effectively admitted defeat in its services strategy by joining forces with Microsoft.

“This is a very frank admission that Nokia’s platform strategy has failed and underlines the seriousness of Nokia’s position. Such a move would have been unthinkable just 12 months ago,” Blaber added.