It's been a while since Microsoft (MSFT) and Nokia (NOK) entered in a partnership, with certain rights to each side. Nokia gets to design and create Windows Phones and Windows Tablets, gets $250 million per quarter as an incentive, and Microsoft gets a license fee per each Windows device sold and Nokia promises Microsoft not to manufacture any Android phones.
This week, Microsoft made two important announcements. The first announcement was regarding a new tablet fully designed and manufactured by Microsoft. The second announcement was about an anticipated Windows 8 OS along with the devices that run on it. In both cases, Microsoft excluded Nokia from the announcements. Interestingly enough, Microsoft's new tablet may even end up stealing market share from Nokia's planned Windows 8 tablet. If this is a partnership where both parties are expected to benefit, Microsoft is not doing its part in the partnership sufficiently.
Microsoft needs Nokia, just as Nokia needs Microsoft. The future of computing is in mobile devices such as smart phones and tablets, and Microsoft doesn't have that much experience with designing and building such hardware. As the company already enjoys much of the market share in the PC market, it needs to increase its presence in the mobile device market in order to grow. Obviously the company partnered with Nokia for that reason as the other two major players in the smart phone market - Apple (AAPL) and Samsung - don't have a preference for Microsoft's operating system. Nokia is the only major player that's willing to throw away the operating systems other than the ones designed by Microsoft.
On the other hand, Nokia also needs Microsoft to survive. First, Microsoft is capable of "bailing out" Nokia if the company runs out of cash. Second, Microsoft can help with marketing of Nokia products as it enjoys one of the biggest brand names in the world. Third, Nokia's very survival depends on the integration of its hardware with Microsoft's software.
Going back to the topic of this week's two Microsoft announcements, I am highly disappointed with Microsoft. Why would it even want to build its own tablets and get in direct competition with Nokia? Perhaps, Microsoft doesn't believe that Nokia will survive, and it decided to take the matters into its own hands. Perhaps, Microsoft will start building phones in a couple years if Nokia starts appearing like it will not survive.
Despite all this, I see 4 positive things in Microsoft's announcement for Nokia. First, Windows 8 devices will use maps designed by Nokia rather than Bing maps. Second, Windows 8 is not as restrictive on hardware producers as Windows 7 was, and Nokia will have more freedom in designing its phone as it wishes. Third, Windows 8 will be more app-friendly than Windows 7. This will definitely motivate many app-designers to switch to Windows 8 from Android (GOOG) or Apple's operating system. Fourth, the latest Microsoft announcements made Windows 8 more salient in consumer's eyes. Many consumers didn't even know that such a thing as Windows Phone existed until recently. Now many consumers will be at least curious about Windows Phones as the brand gained a lot of publicity in the last few days.
As I mentioned before, all Nokia needs to do is to become profitable at the moment. As long as the company stops the cash bleeding, many investors will be happy. There is a lot of potential upside in Nokia, because a possible bankruptcy is already baked in the price of the stock. At the end of the day, Nokia has the potential to prove everyone wrong and if that happens, the stock has more than 50% upside. Of course one needs to be cautious with trading this stock. In the short term, the stock has as much downside as it has upside as investors will continue to panic about the prospects of this company.
Microsoft will probably continue to be a high quality stock due to having a strong dividend history, stability, the dominant market share and strong brand name it enjoys. Microsoft's potential upside will be limited similar to its potential downside. However this is still a good company to invest in for patient investors that have a long term focus.
In conclusion, I believe that Microsoft needs to show more support for Nokia in this partnership as the partnership's success will benefit both parties greatly.
