My Take On The Nokia And Microsoft Partnership

| About: Microsoft Corporation (MSFT)

With the market for smartphones becoming increasingly competitive, we're seeing improvements in technology by leaps and bounds. We're also seeing a larger number of companies entering the market, vying for a share of the pie. However, the ability to establish a dominant position is something that only Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF) seem to possess until now. Between the iPhone 5 and the Samsung Galaxy S series, the entire smartphone-using community can be rather neatly categorized. In recent times though, Nokia (NYSE:NOK) and Microsoft (NASDAQ:MSFT) have come together in an agreement which may just challenge this convention.


In a time before smartphones became a necessity, Nokia was the dominant phone manufacturer. It was one of the most preferred brands among consumers. On the software front, Microsoft's array of products still puts it at the top of the rankings. So how exactly is collaboration between these two companies supposed to offset the popularity of the existing Samsung and Apple brands? And more importantly, is this collaboration capable of creating a big enough impact?

One of the reasons this partnership is advantageous is purely based in economics and market share: Nokia and Microsoft are facing increasing competition to their position as leaders in their respective fields. In Nokia's case, we can even go out on a limb to say it's been knocked down to the bottom of the pack. In order for both these veterans to re-establish themselves, the use of Windows 8 on Nokia's upcoming smartphones seems like a good move to gain some traction in the marketplace. While it may still be an uphill struggle, the fact that there's a new, different product is a starting point to attract consumers.

Apple vs. Samsung

But just because there's a different product doesn't mean that cell-phone users should flock by the dozen to buy them. And that's where Apple and Samsung's rivalry manages to act as a massive boost. In August of this year, after a long and bitter legal battle, Apple walked away with a ruling that several models of Samsung were copied off from the designs of the iPhone. Samsung was also required to pay over a billion dollars in damages. While the premise of the trial and the accusations made by Apple were very specific in nature, they weren't the concern of the average consumer. The only message imparted onto such a person was "Samsung copied the iPhone." And just like that, the image that Samsung had worked so hard to build was taken down.

The Case for Winkia

Nokia and Microsoft on the other hand, could jump for joy. While Apple and Samsung were bending over backwards trying to prove the similarities and differences between their products, the smartphones produced by Nokia were able to stand out without any added effort. Here was a product that had a different, unique interface and slightly better performance than Apple and Samsung in some areas. This is further reinforced by the fact that most reviews of Nokia's Windows phones have been positive - while it takes some getting used to, the performance is second to none. As Ewan Spence at Forbes puts it:

Samsung is handed the lemons, but it's Nokia that will get to make the first batch of lemonade.

Another reason that the Apple-Samsung rivalry offers a competitive advantage to Nokia and Microsoft is because of the operating systems involved. Since Samsung's software and user interface are powered by Google's Android, which also came under crosshairs for violating Apple-held patents over user interface and design features, many application developers will now worry about working with Android, seeing the Windows operating system as a safer option. The shift in preferences means nothing but good for Microsoft, which can use this increased attention to further refine and improve their product. In a nutshell, Samsung's and, in turn, Android's mistake pushes software developers towards Microsoft. Nokia and Microsoft therefore have more reasons to pull consumers towards themselves with.

The end result of the entire scenario is a mounting pressure on Apple and Samsung - perhaps more the latter - to regain the trust of consumers and software developers alike. While Samsung still has a solid position owing to their Galaxy line of products, an unattended chink in the armor will only cause it a larger number of problems. Similarly, Apple's iPhone 5 will face greater competition, since Nokia's Lumia 920 promise better performance, display resolution, interface and more, even if the handset weighs a little more. Provided Nokia is able to impress a large enough number of consumers with products like the Lumia 920 and subsequent releases, it should be able to gain momentum in the marketplace.

The Bottom Line

But is a partnership between Nokia and Microsoft really capable of breaking through the ranks of Apple and Samsung? Perhaps not. While Lumia is a beautiful phone with features in close competition with the iPhone and Samsung's Galaxy, the Winkia combination still fails to impress enough consumers. Now, there are several reasons for this: Microsoft's operating system has not attracted the same level of attention from developers until now, which means that its range of apps and other facilities may be limited compared to Apple and Samsung. Also, because the phone and OS take slightly more getting used to, consumers choose the easy way out and pick a more user-friendly product.

Another reason why the 'threat' posed by Nokia-Microsoft may not be credible enough is the possibility that Samsung might also use the Windows Phone 8 operating system. Windows-based HTC brand phones are already available all around the world. This effectively eliminates the distinguishing feature that Nokia could use to bring more users into its fold, and thus makes the task of rising to the top a little harder, again.

It's only been a few months since the launch of the Nokia Lumia 920, and we have yet to see the next few products that roll off this collaborative assembly line. This means that we can't definitively predict how large an impact these two giants can really have. The task seems difficult, even if possible.

Disclosure: I am long AAPL.

Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

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