What Nokia's Implosion Means for Microsoft's Smartphone Assault

By Michael Comeau Nokia's (NOK) big blow-up yesterday should come as no surprise to anyone with even a mild interest in the mobile-phone business. I said last summer that “if your name isn't Apple (AAPL), Android is going to kill you.” The numbers have supported this theory all along. Gartner pegged Nokia's Q1 mobile-phone market share at 25.1%, down from 30.6% the year before. Nokia did even worse in smartphones, declining to 27.4% of the market from 44.2%. (To see Carol Kopp's piece on Google's digital wallet, click here.) The Big Mobile Picture The broader industry landscape has actually looked pretty solid, with smartphones doing particularly well. Global mobile-phone sales grew 19% in the first quarter of 2011, with smartphones up a whopping 85%. And since then, we've heard bullish comments regarding smartphone demand from all across the supply chain. We're talking everyone from Google (GOOG) to ARM Holdings (ARMH) toQualcomm (QCOM) to NVIDIA (NVDA) to Softbank. The only real negative talk comes from the guys losing market share, namely Research-In-Motion (RIMM) and Nokia, who are both getting killed by the Android and iPhone flood. Where Microsoft Comes In On February 11th of this year, Microsoft (MSFT) and Nokia announced a strategic partnership to “build a new global mobile ecosystem,” inspiring countless snarky writers to bring out the good old “two drunks holding each other up” one-liner. (To read Lloyd Khaner's piece on the issues making investors nervous, click here.) Under the deal, Nokia made Windows its smartphone operating system of the future, with the two companies bringing together their search, mapping, customer billing, and software-development strengths, among others. Bloomberg News reported on March 7th that under the agreement, Microsoft was to pay Nokia over $1 billion, and that the rationale for the deal was to keep Nokia away from Android. The problem now comes in that even if the Nokia deal acts as effective strategic defense against Google, Microsoft's going to shed even more blood in the court of public opinion, along with that pile of cash. Like RIM, Nokia is facing a serious challenge with pricing. It has absolutely nothing to rival the Apple iPhone and high-end Android models. At the same time, both telecom carriers and consumers are quite happy with the growing flood of low and mid-tier Android phones. (To read Raghu Gullapalli's piece on Netflix's room on the upside, click here.) In other words, Microsoft paid a 10-digit price tag to associate its mobile brand with a name that people value less and less by the day. When you're playing catch-up with Google and Apple, that just won't cut it. Nokia is set to release its first smartphone powered by Windows Phone 7 in Q4 of this year. Who knows what kind of shape Nokia will be in by then? Thus, Microsoft's deal to make Nokia its big smartphone partner could go down as even more embarrassing than the Kin fiasco of 2010. This episode won't end well. Expect to hear frequent and loud calls for Steve Ballmer's head. A man in his position can't afford to be made to look ridiculous, and well, that Nokia deal is looking pretty ridiculous. To read the rest, head on over to Minyanville.