Nokia Tumbles on Concern Partnership With Microsoft `May Kill' Phonemaker

Nokia Oyj, the world’s biggest maker of mobile phones, tumbled the most in almost 19 months on investor concern that a partnership with Microsoft Corp. won’t be enough in its battle with Google Inc. and Apple Inc.

Nokia, led by Chief Executive Officer Stephen Elop, unveiled plans today to make Microsoft’s Windows its primary software in the competition for smartphone customers against Apple’s iOS and Google’s Android platforms. Nokia’s shares fell 14 percent, the steepest slide since July 16, 2009.

“My first thought is to sell Nokia stock because Nokia has just given themselves away for free and Google and Apple are laughing all the way to a duopoly,” said Neil Campling, an analyst at Aviate Global LLP in London.

The move may be the biggest strategy shift by Nokia since the one-time wood pulp company began making mobile phones in the 1980s. Elop, who was hired from Microsoft in September to lead the Espoo, Finland-based company, is struggling to revive Nokia after its piece of the fast-growing smartphone market plunged to 27.1 percent in the last quarter from 50.8 percent when Apple shipped its iPhone in June 2007, according to Gartner Inc. Nokia has lost more than 60 percent of its market value in that time.

Nokia’s shares fell 1.16 euros, closing in Helsinki at 7 euros. Microsoft slipped 25 cents to $27.25 at 4 p.m. New York time in Nasdaq Stock Market trading.

“When you are facing a fire, you need to move quickly because it expands fast,” said Pierre Ferragu, an analyst with Sanford C. Bernstein in London. “This partnership will take time to implement and deliver phones. This is what may kill Nokia.”

Partnership Plan

Microsoft, whose Windows Mobile software licenses were doubling annually before the iPhone hit the market, has likewise struggled to win acceptance for its revamped Windows Phone 7 software. The Redmond, Washington-based software maker said it shipped more than 2 million licenses for the new smartphone system in its first quarter on the market. Nokia shipped 28.3 million smartphones in that period.

The deal gives Microsoft access to one of the world’s largest mobile-phone distribution networks. Microsoft CEO Steve Ballmer said at a press conference in London that companies are already working on making the first Nokia Windows phone.

Under the plan unveiled today, Nokia and Microsoft will combine assets and jointly develop and market mobile products. Nokia’s Maps product will become a core part of Microsoft’s services, while Microsoft’s development tools will create applications for Nokia Windows phones.

Question Mark

“Nokia and Microsoft will combine our strengths to deliver an ecosystem with unrivalled global reach and scale,” Elop said at the press conference. “It’s now a three-horse race.” Nokia has no plans to merge with Microsoft, Elop said in an interview.

The Finnish company said that after the “transition years” of 2011 and 2012, it targets Devices & Services non-IFRS operating margin of 10 percent or more. Elop declined to provide a timeline for the first products from the alliance.

“It’s a clear admission that Nokia’s own platform strategy has faltered,” said Ben Wood, a London-based analyst with CCS Insight. “Microsoft is the big winner in this deal, but there are no silver bullets for either company given strength of iPhone and Android.”

Nokia plans to ship another 150 million phones based on its current smartphone operating system called Symbian. It will ship Windows phones in large volumes in 2012, Elop said.

Job Cuts

Nokia plans to “substantially reduce” it research and development budget, Elop said. At 5.9 billion euros ($8.1 billion), Nokia’s corporate R&D spending is more than four times that of Apple’s. Elop said there will be “significant reductions” in Nokia jobs. He didn’t elaborate.

Hundreds of Nokia workers walked out in Tampere, Finland, where about half the about 3,000 employees are Symbian developers -- the platform Nokia is phasing out.

“A lot of workers decided to use flexible working hours and go home to think about what these changes bring,” said Kalle Kiili, a union representative at the unit.

Elop, 47, was hired to put Nokia on a comeback plan, especially for software, the biggest point of difference in smartphones. He made only small adjustments in his first months as he reviewed the business. He announced 1,800 job cuts in the workforce of more than 120,000, changed the development process for the Symbian smartphone code, and appointed a new marketing chief, Jerri DeVard.

Nokia today said it will have two units: Smart Devices and Mobile Phones. It named Jo Harlow to head the Smart Devices unit, while the other will be led by Mary McDowell. In North America, a weak spot for Nokia, it appointed Chris Weber, a 16- year Microsoft veteran, as president of its U.S. unit.

‘Burning Platform’

Since Elop became the first non-Finn to head Nokia on Sept. 21, Google’s Android software has become the biggest smartphone operating system, passing Nokia’s Symbian, according to Canalys and IDC analysis of shipments. The company’s N8 smartphone with the revamped Symbian 3 operating system was greeted by analysts as an improvement, although not enough to reverse the slide.

A memo written by Elop to employees recently said Nokia was “standing on a burning platform” and needed to make significant changes. With the plan unveiled today, Elop is terminating the company’s main Symbian platform, a move that make torpedo sales of existing devices, analysts said.

“Elop has decided to run the risk of really triggering a collapse of Symbian phone sales over the next three quarters,” said Tero Kuittinen, an analyst with MKM Partners LLC in Greenwich, Connecticut. “This is what jumping into the icy sea looks like; embracing a mobile OS with 3 percent smartphone market share. I expected a move to Windows, but not one with this level of religious fervor.”

Android Option

Nokia will bring out a device this year on MeeGo, a high- end operating system it’s developing with Intel Corp., to gauge market reaction, Elop said. MeeGo engineers will then be shifted to work on innovations that can help Nokia leapfrog rivals.

Both Moody’s Investors Service and Standard & Poor’s put the company’s debt on review for a downgrade after fourth- quarter net income fell 21 percent and it signaled margin pressure. The ratings companies said the results showed a loss of competitiveness in the crowded smartphone marketplace.

Android, which is supported by mobile manufacturers including Samsung Electronics Co., HTC Corp. and Sony Ericsson Mobile Communications AB, offers users a slick interface similar to the iPhone for a lower cost of ownership.

Elop said while he did explore the Android option, differentiation would have been difficult.

‘Biggest Question Mark’

Android phones typically have more flexibility in data plans than the iPhone, and make it easy to use virtual calling programs like Skype that reduce monthly bills. The system has proven popular with app developers who have built its Android Market up to more than 100,000 download items.

Google Chief Executive Officer Eric Schmidt said last month that his company is activating more than 300,000 phones a day.

Nokia started as a wood pulp mill in 1865 and expanded in papermaking, rubber, cables, and telephone equipment before helping develop the world’s current cellular phone systems in the 1980s. It passed Motorola Corp. to become the world’s largest maker of mobile phones in 1999, and was Europe’s most valuable company at 203 billion euros in December 1999.

“The biggest question mark here is the timetable,” said Michael Schroeder, an analyst at FIM Bank in Helsinki. “Nokia says 2011 and 2012 are transition years, and no one knows how far along Nokia’s competitors are by then. Nokia can’t do anything to slow its competitors from innovating.”

To contact the reporter on this story: Diana ben-Aaron in Helsinki at dbenaaron1@bloomberg.net

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

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Photographer: Simon Dawson/Bloomberg

Nokia Oyj Chief Executive Officer Stephen Elop on stage with Microsoft Corp Chief Executive Officer Steve Ballmer.

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Photographer: Simon Dawson/Bloomberg

Nokia Oyj Chief Executive Officer Stephen Elop on stage with Microsoft Corp Chief Executive Officer Steve Ballmer. Close

Nokia Oyj Chief Executive Officer Stephen Elop on stage with Microsoft Corp Chief Executive Officer Steve Ballmer.

Photographer: Simon Dawson/Bloomberg

Nokia Oyj Chief Executive Officer Stephen Elop, left, shakes hands with Microsoft Chief Executive Officer Steve Ballmer. Close

Nokia Oyj Chief Executive Officer Stephen Elop, left, shakes hands with Microsoft Chief Executive Officer Steve Ballmer.

Photographer: Chris Ratcliffe/Bloomberg

Nokia Oyj Chief Executive Officer Stephen Elop. Close

Nokia Oyj Chief Executive Officer Stephen Elop.

Photographer: Chris Ratcliffe/Bloomberg

Nokia said its new organization structure will have two units: Smart Devices and Mobile Phones. Close

Nokia said its new organization structure will have two units: Smart Devices and Mobile Phones.

Photographer: Jeff Holt/Bloomberg

Microsoft Corp. Chief Executive Officer Steve Ballmer. Close

Microsoft Corp. Chief Executive Officer Steve Ballmer.

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