The rumors are once again swirling on the topic of Nokia adopting a Microsoft operating system for its smartphones.  A few years ago there were rumors about Nokia adopting Windows Mobile specifically for the US market, where its Symbian-based phones had essentially zero market share.  It never happened.  Could the rumors about Nokia adopting Windows Phone 7 in some fashion be more accurate?

We do know that the mobile device market is quite different today.  Three years ago Nokia held an overwhelming lead in smartphones outside North America with its Symbian-based phones.  When I say overwhelming I mean shares of over 95% in many countries and over 80% worldwide.  Two years ago it was obvious that Nokia was in trouble.  You could look at the market share numbers and see that every point of market share that the iPhone gained was coming directly from Nokia.  Nokia wasn’t ignoring the situation, though I suspect in its arrogance it thought its market share, customer loyalty, and carrier relationships would give it a lot of time to respond.  However  Nokia’s attempts to forge its own (later in partnership with Intel) Linux-based OS to replace Symbian have turned out to be too little too late.  Today Nokia looks like it is in a death spiral.  It still has absolutely no presence in North America, its market share continues to drop, it still is surviving on its Symbian legacy, and the ability to build an ecosystem around yet another new OS is questionable at best. 

Of course Nokia has also had a change in leadership at the top, with former Microsoft exec Stephen Elop now its CEO.  While Elop is probably more open to the idea of using Windows Phone 7 than his predecessor, I wouldn’t count on his previous association with Microsoft as necessarily making him lean in that direction.  What I would take into consideration is that Elop knows quite a bit about both the Windows Phone strategy and all the other mobile-related activities going on at Microsoft.   And that gives him an unusual perspective in trying to negotiate a relationship with Microsoft around Windows Phone 7.

Before I dig into the possibility of Nokia using Windows Phone 7 I should point out why this is somewhat of a “match made in hell”.  Had Nokia wanted to partner with Microsoft two to three years ago, when they were still in a leadership position, they would have been operating from a position of strength.  A Nokia-Microsoft partnership would have been compared to the IBM-Microsoft partnership that made MS-DOS, and then Windows, the dominant PC OS.  Nokia’s ability to influence Microsoft, obtain some level of exclusivity or special offering, perhaps even to become an equal co-partner on Windows Phone 7, would have been very high.  Today, with Nokia on the ropes, it isn’t clear that Microsoft would want to do anything with Nokia that harms its relationship with Samsung, HTC, and LG.  So both parties are negotiating somewhat from positions of desperation.

I think there are essentially three scenarios for Nokia adopting Windows Phone 7.  They range from ho-hum to wow.  Lets start with ho-hum.  Nokia’s biggest business weakness is that it isn’t a significant player in the North American market.    Turning around its business overall gets a lot simpler if it can become a big player in the US.  It can’t do that by continuing to beat its head on the wall with Symbian and there really isn’t time to build a successful ecosystem around a new OS.  That leaves Android and Windows Phone 7 as the only vehicles that would allow Nokia to quickly enter the US smartphone market.

On the surface Android seems like a more obvious choice.  Nokia was already going down the Linux route, Android would preserve that and some of their MeeGo-related investments.  Nokia would probably want to customize the user experience to more of a Nokia experience, and Android lets them do that far more than Windows Phone 7.  On the other hand, if this is purely a North America play then these advantages are likely unimportant.  Nokia would be seeking a low software investment approach while it focuses on something else for its world-wide strategy.  And the Android world is just saturated with great devices.  Motorola is hitting it out of the park with both low-end and high-end Android devices.  Samsung’s Galaxy S/Nexus S are perhaps the best high-end phones out there.  And everyone else under the sun is in this business.  Could Nokia really stand out in this crowd?

On the other hand, there is no established leader in the Windows Phone 7 market.  Sure the Samsung Focus is an awesome device.  And the HD7 is well-loved.  But the number of devices is still limited, all of the Windows Phone 7 manufacturers are conflicted in also having Android offerings, and no one really has mind share yet.  A Nokia entering the US smartphone market focused entirely on Windows Phone 7 has a good shot at becoming the leading provider of Windows Phone 7 phones.  As small as Windows Phone 7 is compared to Android right now, Nokia’s unit volume would likely be higher and the mind share it would establish would certainly be higher.  And the mind share is important, because if Windows Phone 7 is only a North America play for Nokia then someday it will want to bring whatever its worldwide play is to North America.

Another consideration is the marketing assistance that Microsoft is likely to provide to Nokia should it enter the Windows Phone 7 market.  We all know Microsoft is spending heavily to establish Windows Phone 7, and no doubt much of that money is going to joint marketing efforts.  For example, do you really think that AT&T is paying the full cost of all those Windows Phone 7 ads? 

Finally, there is an intangible here.  To some extent both Microsoft and Google are competitors to Nokia because of its own software and services aspirations.  So you have to ask who does Nokia fear more, Microsoft or Google.  I have no doubt it is Google.

A second possible strategy is that Nokia goes with a high/low worldwide strategy with Windows Phone 7 as its high-end OS and then either sticks with Symbian, continues the move to MeeGo, or goes with Android on the low-end.  I’m not going to go into this one too much, but it seems like it could be a winner or loser depending on the details.  Sure they could be in both the Android and Windows Phone 7 businesses, just like Samsung and HTC.  Or they could use Symbian to hold the fort as Windows Phone 7 increases its range.  But I don’t understand how MeeGo would fit in, because they still have the problem of building an ecosystem in a world where IOS, Android, and Windows Phone 7 (taking advantage of the large existing .NET/Silverlight/XNA ecosystem) have sucked up all the development resources.

The most exciting strategy is of course the one where Nokia adopts Windows Phone 7 as its full next generation smartphone platform replacing current plans to move to MeeGo.  This is where two things I mentioned earlier come into play.  The first is Microsoft’s likely reluctance to give Nokia much special consideration because it could alienate other partners.  With its other partners, particularly Samsung and HTC, committed to and leaders in the Android market Microsoft would see Nokia’s exclusive adoption of Windows Phone 7 as sufficient justification to risk alienating other partners.  They would probably mitigate this by avoiding doing anything exclusive in the core platform (not that this is out of the question), but rather by partnering in other areas.  For example, Microsoft and Nokia have an existing partnership (negotiated by Elop while he was at Microsoft) around putting Microsoft Office capabilities on Nokia Symbian devices.  One could imagine Elop seeking to expand that partnership to offer greater information worker capabilities on Nokia devices than on those available elsewhere.  One could see taking this another step forward , with Microsoft and Nokia collaborating widely to make Nokia the lead partner as Windows Phone 7 addresses the corporate market.  Elop’s knowledge of other activities around Microsoft could lead to partnerships in other areas.  For example, is there something that Nokia and Microsoft could do to bring enhanced Search-based capabilities to Nokia devices over those in the core platform?  What is going on in MSR that Nokia might want to partner with Microsoft to productize?  What about a broader partnership (Microsoft already licenses data from Nokia-owned Navteq) on maps and navigation?  Or collaboration between Windows Live and Ovi services?  It is also possible that in order to land an exclusive deal with Nokia, Microsoft would make core platform change that were not exclusive to Nokia but that forced Microsoft to change some of its approach with Windows Phone 7.  For example, what if in order to land Nokia Microsoft had to allow them to do more customization than it currently allows or desires to allow?  This is probably something they would then provide to all of their device partners.

The key here just how broad and exclusive Nokia’s commitment to Windows Phone 7 would be.  If this is a North America only play then I think from Microsoft’s perspective they are just another device manufacturer and this is more important for Nokia than Microsoft.  However, if Nokia totally replaces its MeeGo strategy with a Windows Phone 7 strategy then its a game changer.  For Nokia, Microsoft, and the mobile device industry.

Sadly I think the most likely announcement is that Nokia is dumping MeeGo in favor of an Android strategy, or perhaps an Android plus Windows Phone 7 strategy like Samsung and HTC have.  This will be good for Nokia, and in the later case reasonably good for Microsoft.  But it won’t change the dynamics of the smartphone market at all.