Nokia dropped a bomb on Friday as chief executive Stephen Elop announced an alliance with Microsoft to adopt Windows Phone 7 as its smartphone platform of choice. It hasn’t dropped Symbian and Meego altogether but the two will become open source platforms and the company will continue to ship Symbian devices for the remainder of the year.

This is something that many had expected to happen especially since Stephen Elop left Microsoft to replace Olli Pekka Kallasvuo as Nokia CEO and president. However, this is not what many Nokia fans and supporters had hoped for. Indeed, as far as Nokia’s platforms are concerned, this is a death knell.

Spiralling into irrelevance

At the moment Nokia still enjoys the largest global market share  for the entire mobile phone industry and 37% of the global smartphone market, according to Gartner. However, Asymco notes that Nokia’s profit share since 2007 had gone from more than 50% of the entire industry to roughly 20%. The most profitable mobile phone company is now Apple which gained 51% global profit share having sold only 4% of the word’s mobile phones.

Nokia is hurting and it’s hurting really badly. Despite enjoying market leadership, it is in fact in decline. Its profit share dwindling, its mind share in tatters, its innovation stagnant. No longer do companies strive to copy or imitate Nokia. Developers have mostly left the Symbian platform in favor of iOS and Android. The N8 which is supposed to be the company’s highlight and savior, did not sell well at all. Its Ovi initiatives had failed to make a dent in the mobile application and music markets. Nokia crashed and is now burning, its own CEO had admitted as much.

With this partnership, many fear Nokia may suffer the same fate as Palm down the line. Like Palm, Nokia hopes to bring back short term profitability by letting Microsoft do the work on the software side of the mobile equation while they focus on churning out the hardware. It’s leaving Symbian behind and cutting off most of the air flowing into MeeGo.

This deal with Nokia however, surely will ruffle the feathers at LG who is also Microsoft’s strategic partner. Perhaps Microsoft decided to up the ante with Nokia after an LG executive publicly expressed his strong disappointment at Windows Phone 7.

Terms of the deal

Nokia and Microsoft had revealed a handful of the terms of their  partnership but neither company  has yet said what will happen to Nokia’s existing markets.

Aside from using Windows Phone 7 as its preferred smartphone platform, Nokia will use Bing on all its handsets and adopt Marketplace as its app and music stores. Microsoft also gets access to Nokia’s billing service which allows charging for content downloads through phone bills instead of credit cards.

These are all wins for Microsoft as Nokia cedes control over its platform. Nokia’s one win from this deal? Nokia Maps to power Microsoft services.

What of Ovi Store? The fledgling service built in to every Nokia smart phone looks to be deprecated as Windows Phone 7 becomes more common. Ovi Music had been shut down in most parts of the world which leaves the application store. With the announcement that Qt will not be available for Windows Phone 7, it makes no sense for developers to continue creating apps using this environment. Whether they will jump to WP7 remains to be seen.

Plan to disrupt the market

As part of the adoption of WP7, Nokia has agreed to ramp down on Symbian development. The company may have stated that it will still ship 150 million Symbian devices this year but nobody expects sales of those units to be brisk. Elop said the partnership will disrupt other mobile ecosystems swiftly but unless Nokia can churn a family of Windows phones by summer, swift it will not be.

By the middle of the year, we’ll have new versions of iOS, Android, and webOS being rolled on to the market along with significantly upgraded hardware. Windows Phone 7 software has yet to see its first update since its launch in October last year. Nokia itself had the N8 delayed by almost a year, finally delivering the phone when it no longer mattered. These further compound the doubt over Elop’s claim of being swift.

Microsoft’s Windows Phone 7 is not widely available and the Marketplace is not global. Microsoft had decided that the selection of phones would be limited by region, possibly to ensure each partner get maximum exposure to drive the platform rather than running head to head against each other.

For all Microsoft’s strategies, they don’t seem to work. Gartner reports that while there were 111 million units of Symbian handsets in the market in 2010, Microsoft’s Windows Phone 7 only managed 2 million units since October. Even then, it is not sales to consumers but to resellers and sales partners.

In traditional Nokia strongholds, even the low end markets are being seized by a multitude of brands. China’s ZTE has eaten much of Nokia’s lunch in the Asian market for cheap phones and has crept up to become the world’s number four phone manufacturer, knocking Apple to fifth. Nexian is grabbing the low end market in Indonesia and various brands using cheap MediaTek chips are flooding the scene.

So how exactly does Nokia plan to disrupt the market?

The fall of giants?

Some say the Nokia-Microsoft alliance is like the Hindenburg meeting the Titanic. Both giants in their respective fields hoping to stay afloat in an onslaught of smaller, more agile competitors. Om Malik likens it to the fall of the British Empire. Google executive Vic Gundotra said, “two turkeys don’t make an eagle,” — though Elop responded by proxy saying, “two bicycle makers from Dayton, Ohio one day decided to fly.” He was referring of course, to the Wright Brothers.

Microsoft has never managed to get a grip on the mobile industry. Its Windows Mobile platform never took off even during its heyday and was laid to rest once Apple crashed the party. Nokia still dominates but has failed to take advantage of that position and in the past year has lost a significant portion of its lead.

Windows Phone 7 is the freshest and most innovative software to come out of Microsoft in years and all it needs is a really good hardware partner. Nokia is arguably the world’s best mobile phone manufacturer and distributor but it hasn’t managed to come up with a compelling smartphone software. Its Symbian hasn’t really progressed in years, it shelved Maemo, and by the time MeeGo comes out (if it ever), the world may have moved beyond mobile devices as we know it.

Whose phone is it, anyway?

Seen through this perspective, Microsoft and Nokia could be a match made in heaven — but is it? Both companies lack focus and execution. Both have had issues with significantly delayed products. Both companies are too large to pull quick maneuvers and both made the jump from burning platforms. Will the two giants sink together or will they be able to pull each other out?

Given Microsoft’s past partnerships, things don’t look too good for the Finnish company. Asymco, again, highlighted this sad history of partnerships. Nokia’s own Microsoft history apparently had Elop’s signature all over it and produced nothing of value. Microsoft’s mobile partnerships had gone from failure to failure to failure.

With former Microsoft executives at the helm in the headquarters and in the US, and the company’s smartphones to rely on WP7, Nokia is becoming essentially Microsoft’s mobile hardware division. They may be working closely together to create unique phones in the WP7 ecosystem, but they won’t really be Nokia’s phones — they’ll be Microsoft’s.

[image from Nokia]