February 11, 2011 10:16 pm

Elop jumps into the arms of former boss

Stephen Elop saved the best until last by confirming that he was the author of Nokia’s doomsday memo that leaked this week.

Nokia’s chief executive completed a strategy statement on Friday by admitting that he had privately compared the group’s predicament to a man standing on a burning North Sea oil platform, torn between being burnt alive and jumping into icy waters.

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On Friday, Mr Elop, a Microsoft executive until last September, jumped into the arms of his old boss.

At a London hotel, Mr Elop was joined by Steve Ballmer, Microsoft’s chief executive, and the two men announced a partnership under which the Finnish group plans to use the US tech company’s smartphone operating system.

Mr Elop is betting that Microsoft’s Windows Phone operating system will belatedly enable Nokia to fightback against Apple’s iPhone and devices featuring Google’s Android smartphone operating system.

Analysts said Nokia’s adoption of Windows Phone amounted to a final admission of defeat in its own platform strategy.

Investors seemed to agree with Pierre Ferragu, analyst at Bernstein, when he said: “It is hard to see any negatives in the deal for Microsoft, and it is hard to see any positives in the deal for Nokia.”

Microsoft’s shares barely moved, but Nokia’s were down sharply.

Microsoft gains from the tie-up with Nokia because it gives the US group the chance to secure the scale it craves in the mobile world.

Microsoft was a leader in smartphone software before the iPhone’s launch in 2007, but Windows Phone’s market share slipped to just 4.2 per cent last year, according to Gartner, the research firm.

With Nokia, the largest mobile maker, using Windows Phone, Microsoft could see its operating system become a mass-market phenomenon.

Nokia’s use of Windows Phone should put Bing, Microsoft’s internet search engine, centre stage on the Finnish company’s smartphones.

Microsoft’s search advertising business could therefore also get a big boost.

Nokia’s investors, meanwhile, were alarmed by how the Finnish company will pay royalty fees for using Windows Phone, which analysts estimated at between $10 and $20 per smartphone.

The fees highlight how Nokia does not have exclusive rights to use Windows Phone.

Microsoft will continue to let other handset makers such as Samsung make smartphones with its operating system.

Nokia’s investors also fretted at how long it would take the company to produce a smartphone featuring Windows Phone.

Mr Elop said Nokia would have several smartphones based on Microsoft’s platform in 2012, but could he not confirm any for this year.

He went on to say that Nokia must become a faster organisation, but analysts claimed the apparent complexity of the tie-up between Nokia and Microsoft might slow innovation.

Nokia faces a tricky transition towards becoming a smartphone maker that uses Windows Phone as its primary platform.

For the next two years or more, Nokia wants to continue selling devices based on its much-criticised Symbian smartphone operating system, while it ramps up use of Windows Phone.

It is unclear whether many consumers will want to buy Nokia’s Symbian devices if they know the operating system has a limited shelf life, so the company could continue to lose smartphone market share this year.

Still, Mr Elop appears to have had little choice but to adopt the strategy that he has.

He implied that MeeGo, a smartphone operating system that Nokia has been developing with Intel, the US chipmaker, might not be capable of becoming a mass-market platform.

Mr Elop also rejected the case for using Android, saying that the adoption of Google’s operating system would probably ensure that Nokia’s devices suffered commoditisation.

Mr Elop also knew that if he had opted for Android he would almost certainly have alienated some of Europe’s big mobile phone operators, which are Nokia’s leading customers.

The operators fear a duopoly could emerge in the smartphone operating system market involving Android and iOS, Apple’s iPhone platform.

Mr Elop claimed that many operators were backing Nokia’s tie-up with Microsoft on Windows Phone because it meant there would be a “three-horse race”.

There are other positives for Nokia with Windows Phone.

The latest version of Microsoft’s operating system, called Windows Phone 7, has had good reviews and could give Nokia the chance of a breakthrough in the US market.

Mr Ballmer highlighted how Microsoft, rather than Nokia, would fund research and development on Windows Phone.

Nokia said its research budget should fall, though it disappointed some analysts by not providing figures.

Mr Elop, sitting alongside his old boss, was unfazed by Nokia’s falling shares.

“At some point people will recognise that this is a substantially economically advantageous deal for Nokia,” he said.

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