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Microsoft and Nokia Partner: 6 Reasons Apple and Google Should Be Worried

Nokia (NOK) has broken with years of tradition, tossed its own software development work, and partnered with Microsoft (MSFT) to put Windows Phone 7 on all its smartphones. In other words, Nokia is giving up on insisting that all things be invented in house. MeeGo, Nokia's high end phone software, is now MeeWent. Symbian, its other smartphone software, is Sentbian.

But more importantly, the two companies want to build a massive third ecosystem to rival those of Apple (AAPL) and Google (GOOG). Although both Microsoft and Nokia had fallen behind their competitors, the combination of the two companies, their capabilities, and their strengths could offer a massive challenge to the mobile status quo. Executives at Apple and Google have to be worried, because this was the brilliant strategic move of their nightmares.

Microsoft had fallen far behind in mobile, and the roll-out of Windows Phone 7 -- not a perfect phone experience, but pretty impressive, especially for a Microsoft first release -- has been slower than the company would have wanted. To a degree that it played numbers games with the press. Embarrassing for the king of PCs. And Nokia CEO Stephen Elop admitted that the company was hammered on every product market segment, except maybe Finnish phone buyers.

Apple and Google, along with the latter's hardware partners, must have hoped for the status quo. But together, the two companies could quickly become a massive force in smartphones. Microsoft has a solid platform, extensive connections with developers, and a willingness to spend money to promote. Even though Nokia has fallen behind from a platform perspective, it still sells the most smartphone hardware units of any vendor and has a lot of pull with carriers. And the partnership offers seven angles that are either advantages to the two companies or disadvantages to their competitors.

  1. Nokia gets out of the doldrums. For years, Nokia has been flopping about, wanting to do better but sticking with old strategies and sitting in a bureaucracy so thick that stories of its manifestations could make your eyes cross. Although Elop's move to someone else's operating system may seem risky, it actually isn't as dangerous as leaving the company where it has been. You could call the move courageous except, as Elop said, the company stood on a burning platform. The other choice was immolation.
  2. Microsoft has a partner desperate enough to push its platform. Steve Ballmer's management team had to make Windows Phone 7 work. Windows Mobile had become unimportant after once having a sizeable market share. As much of user computing moved to smartphones and tablets, losing hold of those platforms endangered Microsoft's entire business. However, the company's hardware partners put Windows Phone on largely mediocre devices -- they all had other irons in the fire with Android. Little excitement meant few sales. But Nokia is every bit as desperate over its future as Microsoft is. Elop will drive his company to do the best it possibly can, and that will likely be impressive. Innovation will turn into market excitement and improved sales.
  3. Microsoft no longer has a reason to create its own hardware. Microsoft came out with the Kin. It stunk and barely sold anything. With Windows Phone results that were lackluster compared to Android or iOS, creating its own branded phone could have been a temptation with the downside of angering its existing hardware partners. Nokia-branded Windows phones are a far better substitute.
  4. Third-party developers get a potentially massive audience. Elop is right: Ecosystem is everything in mobile. With a determined push by such a big manufacturer, and Microsoft's proven willingness to even pay app developers to create for its platform, many small software companies will find the new platform attractive and worth risking some development. With any reasonable degree of sales success, that will become a self-reinforcing trend.
  5. The patent hammer comes down on Google. One of Android's biggest weaknesses is vulnerability on the patent front. It's been attacked by multiple companies, including Microsoft and Apple. Nokia has a scary number of fundamental patents in this area, and Google doesn't indemnify the hardware vendors. And Microsoft also understands the strength of intellectual property as a defensive and offensive tool (and has the patents to back it up). This could quickly turn into a lawsuit fest that makes it too risky for companies to use Android. As patent watcher Florian Mueller points out, this could also calm the patent waters between Apple and Nokia, as there is no way Apple picks a fight with Microsoft. It's too dangerous. Google is the clear loser.
  6. Microsoft drives other partners. If nothing succeeds like success, then nothing makes you more in demand than popularity. All the companies that have jumped into bed with Android are going to reconsider giving Nokia a free shot at promoting itself via Microsoft. Expect an increase in the number of Windows Phone units available and their general quality.
Executives in industries (other than banking, these days) generally avoid big risks. No one wants to be branded as the person who sank the company. But, as Nokia's Elop knows, doing nothing can be an even bigger danger. Partnering with Microsoft is risky, but just enough for both companies to win big.

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Image: Nokia