Nokia Said to Be Near Software Partnership With Microsoft

Nokia Oyj is close to announcing a software partnership with Microsoft Corp., a bet that together the two companies can better challenge Google Inc. and Apple Inc., according to a person with knowledge of the discussions.

Nokia Chief Executive Officer Stephen Elop has held talks with Microsoft CEO Steve Ballmer about putting Microsoft’s mobile operating system on Nokia phones, said the person, who asked not to be identified because the discussions were private. Elop also held talks with Google CEO Eric Schmidt about using Google’s Android software, the person said. Those discussions are unlikely to lead to an alliance, according to another person familiar with the matter.

Elop will unveil a new strategy for Nokia at an event in London tomorrow, laying out his comeback plan for the smartphone market. The partnership with Microsoft, if clinched, would be aimed at helping both companies claw back ground lost to Android and Apple’s iPhone at the high end of the market.

The 47-year-old former Microsoft executive may also seek changes in the executive suite and a review of Nokia’s smartphone platforms Symbian and MeeGo, and try to squeeze more out of the company’s 5.9 billion-euro ($8.1 billion) corporate research and development budget -- more than four times Apple’s

Some investors and analysts say the steps may be too little, too late for the world’s largest mobile-phone maker.

“Very few companies regain their leadership once they’ve lost it,” said Hakim Kriout, a fund manager at Grigsby & Associates in New York, who holds Nokia shares. “It’s a very difficult thing to do because their demise tends to originate from a combination of problems rather than one or two issues.”

Strategic Alliance?

Laurie Armstrong, a U.S. spokeswoman for Espoo, Finland- based Nokia, didn’t respond to requests for comment. Dawn Beauparlant, a spokeswoman for Redmond, Washington-based Microsoft, declined to comment. Mike Nelson, a spokesman for Google in Mountain View, California, didn’t immediately respond to a message seeking comment.

Nokia would prefer to have a strategic partnership with a software company, rather than just being one of the many companies that license Android software, one of the people said. The idea would be to wed Nokia’s market share, which is especially high in emerging markets, with Microsoft’s Internet and software know-how, the person said.

Android is licensed to dozens of companies, which use it for both smartphones and tablets. Samsung Electronics Co. and HTC Corp. are the two biggest makers of devices based on the software, according to research firm Gartner Inc.

‘Attitudinal Shift’

Elop took the helm at Nokia in September after a stint as head of Microsoft’s business-software division. Taking on the competitive threats may require an overhaul of the mindset at Nokia, Elop has said. The company currently relies on a smartphone operating system called Symbian, and it’s developing another software platform with Intel Corp. called MeeGo.

“We need an attitudinal shift,” Elop said last month. “We must improve the quality of our execution, accelerate the speed at which we execute, and enhance the effectiveness of our partnerships.”

That may mean changing some managers. Nokia has no executive vice presidents left from Chairman Jorma Ollila’s “dream team” in the 1990s. Some executives joined the ranks when Ollila was still in charge in the mid-2000s, including Mary McDowell, who runs low-end phones, Kai Oeistaemoe, now in corporate development, Tero Ojanperae in services and Niklas Savander in marketing.

‘Burning Platform’

A memo purportedly written by Elop to employees -- which Nokia neither confirms nor denies -- shows he’s aware of the issues that ail Nokia. The company is “standing on a burning platform, and we must decide how we are going to change our behavior,” he is cited by technology blog Engadget as saying in the memo. Elop said Jan. 27 that Nokia “must build, catalyze and/or join a competitive ecosystem.”

Photographer: Andrew Harrer/Bloomberg

Microsoft CEO Steve Ballmer. Close

Microsoft CEO Steve Ballmer.

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Photographer: Andrew Harrer/Bloomberg

Microsoft CEO Steve Ballmer.

Analysts and investors took the comments to mean that Elop is willing to rethink Nokia’s device platforms. Berenberg Bank analyst Adnaan Ahmad recommended in a note that Nokia scrap MeeGo. Nokia plans to replace Symbian with MeeGo on high-end devices. Elop postponed the first MeeGo handsets, due in 2010, to this year.

“I think there’s a lot of hope that they’re going to have a massive cut in R&D, and that may be hard to do without abandoning Symbian,” said Stuart O’Gorman, an investment at Henderson Global Investors Ltd. in Edinburgh.

Symbian needs more keystrokes to do less than the iPhone and Androids even after a yearlong revamp, and its Ovi Store apps catalog is far behind, driving customers to its rivals.

Credible Strategy

Android has more than 100,000 applications and a wide range of price points. Android fans can get a 3,100 yuan ($470) device like HTC's Desire or they can pocket a $150 ZTE Blade with similar features. Cheaper Androids are a popular step up from Nokia midrange phones -- even in Nokia’s home market of Finland.

“People who would earlier have bought a 50 to 80 euro smartphone are trading up,” said Panu Lehti, head of business development at Finland’s biggest phone company Elisa Oyj, where the ZTE Blade has been the best-selling handset for the past two months. “Before, new entrants didn’t have good enough software and that’s been changed by Android.”

Since Elop joined, Nokia shares have risen about 6 percent and traded 1.2 percent lower at 8.3 euros as of 11:19 a.m. in Helsinki. In the same period, Apple has advanced more than 26 percent, while Google has gained 21 percent.

“Stephen Elop does realize what the problems are, but the question is whether there is a credible strategy and whether they can execute it without compromising their existing sales,” said Henderson’s O’Gorman. “They’ve done the easy step that previous management didn’t take, which is realizing the problem. The harder steps are still to come.”

For Microsoft

Microsoft shares also have lagged behind those of rivals. The stock is little changed over the past year, hampered by struggles in mobile phones and tablets. Even though Nokia’s Symbian lost market share last year, it still accounted for 37.6 percent of smartphone sales, according to Gartner. That would potentially give Microsoft a larger beachhead in the industry.

Microsoft released an overhauled mobile operating system last year, aiming to get more phone manufacturers to adopt it. So far, the new software hasn’t sparked a turnaround. The company shipped 2 million copies of the operating system, called Windows Phone 7, last quarter, disappointing analysts.

Microsoft needs to show accelerating growth, Kevin Burden, an analyst at ABI Research, said last month. A major way to do that is to get a handset maker to put a considerable amount of effort behind a Windows device, he said.

Microsoft shares dropped 31 cents, or 1.1 percent, to $27.97 yesterday on the Nasdaq Stock Market, while Google declined $1.88 to $616.50.

To contact the reporters on this story: Carol Hymowitz in New York at chymowitz1@bloomberg.net; Dina Bass in Seattle at dbass2@bloomberg.net; Diana ben-Aaron in Helsinki at dbenaaron1@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net; Vidya Root in Paris at vroot@bloomberg.net

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