Nokia, Microsoft Forge Alliance on Smart Phones

This story originally appeared on CNET.com.

Microsoft and Nokia announced a broad mobile phone partnership today that joins two powerful but lagging companies into mutually reliant allies in the mobile phone market.

As expected, Nokia plans to use Microsoft's Windows Phone 7 operating system as part of a plan to recover from competitive failings detailed in Nokia Chief Executive Stephen Elop's "burning platform" memo.

But it's deeper than just an agreement to install the OS on Nokia's phones. Instead, the companies call it an attempt to build a "third ecosystem," acknowledging that competing with Apple's iOS and Google's Android involves a partnership that must encompass phones, developers, mobile services, partnerships with carriers, and app stores to distribute software.

"There are other mobile ecosystems. We will disrupt them. There will be challenges. We will overcome them. Success requires speed. We will be swift," Elop and Microsoft CEO Steve Ballmer said in a boldly worded open letter. "Together, we see the opportunity, and we have the will, the resources and the drive to succeed."

The companies will cooperate tightly under an agreement the companies just describe so far as proposed, not final. Under the deal, Windows Phone 7 would become Nokia's "principal" operating system, and Nokia would help Microsoft develop it and ensure a broad range of phones using it are available globally.

Nokia will use many Microsoft online services, many of which trail Google rivals, such as Bing for search and maps and AdCenter for advertisements.

When it comes to the sales part of the ecosystem, each company brings something to the deal. Microsoft phones will be able to link up with Nokia's agreements for carrier billing--a popular option in parts of the world where credit cards are less common. And Nokia will fold its own app store into the Microsoft Marketplace.

Elop the optimist
In a press conference today, Elop and Ballmer touted the alliance as good for both companies' aspirations.

"A pessimist sees the difficulty in every opportunity, but an optimist sees the opportunity in every difficulty," Elop said, quoting England's historic prime minister Winston Churchill as he spoke in London. "I am an optimist."

It's not immediately clear what needs to be done to make the deal final; details "specific details of the deal are being worked out," the companies said.

Nokia, once the dominant power of the mobile phone industry, has ceded the smartphone initiative to Apple's iPhone and Google's Android, and Elop believes Nokia's own Symbian and MeeGo operating systems aren't competitive. Microsoft has tried for years to penetrate the mobile phone market, and although it now has a credible option with Windows Phone 7, it trails Android when it comes to developer interest and the breadth of phones available.

The two companies can expect their combined might will be more convincing for software authors debating whether they need to bring their apps to yet another ecosystem. But it's not yet clear how the alliance will extend to another hot new market, tablets, where Microsoft prefers Windows instead of the Windows Phone operating system. In contrast, iOS and Android developers enjoy the same mobile operating system on phones and tablets.

An end for Symbian, MeeGo
The partnership means a gradual end for both Symbian and MeeGo, Nokia's mainstream and next-generation smartphone operating systems, respectively. Symbian will be gradually phased out in favor of Windows Phone, though Nokia expects to ship 150 million more Symbian phones in the meantime.

And although Nokia will ship a single MeeGo-based smartphone later this year, Elop consigned it to near-oblivion by calling it merely "an opportunity to learn." MeeGo engineers will "change focus into exploration" of future devices and user services.

Nokia seriously considered using Google's Android operating system, but feared it would ultimately be a boon for Google and a bane for Nokia, Elop said.

"We would have difficulties differentiating within that ecosystem," Elop said. Joining the Android world would make it even bigger, "with prices, profits, and everything being pushed down, and value moving to Google."

Nokia cost-cutting
Along with Nokia's new operating system strategy come major internal changes. Leadership in the United States, a large market now awakened to smartphones but where Nokia trails particularly badly, is being replaced. Bureaucracy will be cut. Research and development costs will be cut but R&D will become more productive. And there will be substantial layoffs, in Finland and elsewhere, Elop said, though the company will not move headquarters anywhere else.

"Already evolving rapidly at Nokia is a change in attitude and behavior" that shows "the fighting spirit of Nokia worldwide and the fighting spirit of the Finnish people," Elop said. In communicating with employees about the change, including an company-wide message earlier this morning, he added, "We've been vocal and transparent about the challenge. I think it's having a positive effect."

Nokia will pay Microsoft royalties for use of its operating system, but apparently money will likely flow the other way, too, Ballmer and Elop said.

"We have different forms of value transfer in different directions," Elop said. "We have new opportunities that come from advertising and new forms of monetization."

"We the ability to activate users and put them in a position to be more effective in what we call local commerce," added Ballmer. "Nokia has not just got mapping but other assets that we will import, if you will. There are a set of financial considerations for that as well."

Elop and Ballmer detailed their proposal immediately before the vast Mobile World Congress trade show in Barcelona, Spain, where a large number of new Android phones and tablets can be expected.

It's uncertain what effect the alliance will have. Microsoft has had strong operating system partnerships with multiple competing PC makers, but the Nokia alliance, with mutually developed products and shared road maps, appears much deeper than the average relationship Microsoft has with hardware makers. That could encourage those who've made strong Android commitments--HTC, Motorola, Sony Ericsson, LG Electronics, Samsung, and more--to double down. After all, they're all enjoying a period of relative freedom with Nokia in its present relatively uncompetitive state, and strongly pushing Windows Phone products arguably would be abetting the enemy.

Although the alliance is nonexclusive, Nokia clearly is becoming the premier Windows Phone partner. "There are things we are planning to do with Nokia that are unique," Ballmer said.

The announcement was accompanied by a YouTube video featuring Microsoft and Nokia's chief executives praising the deal.

"Today, Nokia and Microsoft intend to enter into a strategic alliance," Elop said in the video, a precursor of a turnaround plan he's set to detail later today at an analyst conference in London. "Together, we will bring consumers a new mobile experience, with stellar hardware, innovative software, and great services. We will create opportunities beyond anything that currently exists."