Will Microsoft turn things around for Nokia?

A 19% drop in sales, a 39% fall in smartphone shipments and just four million Lumia devices shipped – compare with Apple, which sold 35 million iPhones in its last quarter – left the company’s CFO admitting the performance was “not acceptable.But CEO Stephen Elop has taken a forward-looking approach to the figures, still hopeful his former employer, Microsoft, will be the answer to Nokia’s woes.

“We established a preferred position with Microsoft right from the beginning… and we have a very close and very communicative relationship,” he said.

As a follow up to Nokia’s commitment to Windows Phone 7 (WP7), ditching its Symbian platform last year in favour of Microsoft’s software, Elop now believes the release of the Windows Phone 8 mobile operating system, and the accompanying Windows 8 tablet and PC versions, will be the ticket to big sales and a resurgence of popularity for the Finnish manufacturer.

The idea is that as customers get excited by the Windows 8 launch, due in October, they will want to spread that experience across all their devices, be it the Xbox or laptop at home, to their smartphone on the move.

“Windows Phone 8 will become familiar to people because of Microsoft's huge advertising campaign,” said Elop. “It will have a halo effect for Nokia.”

Carolina Milanese, research vice president at analyst firm Gartner, agreed it could have the desired effect.

“The roll out of Windows 8 on tablets and PCs will certainly help raise awareness of Metro [the user interface used by Windows Phone and Windows 8] among consumers and the marketing push on Windows 8 will rub off on Windows Phone 8, both in awareness with consumers and appeal to developers,” she said.

“Right now Nokia has to be focused. Working with Microsoft gives them financial support on platform evolution and marketing.”

But Nokia has misplaced its faith in Microsoft before. The dedication to WP7 hasn’t yet led to the third ecosystem both companies were planning on in the mobile market, to take on the might of Apple and Android. Instead it has been a costly investment that has far from paid off, with relatively limited interest from consumers.  

When Elop took charge of Nokia in 2010, the company sold 28 million smartphones and was the largest phone manufacturer in the world, based on device shipments. But smartphone sales have fallen by almost two-thirds since the commitment to Windows Phone and Samsung is now topping the table as the highest-selling phone maker.

As Milanesi said, the added marketing dollars and focus that Microsoft will bring the company will be a massive boost while it tries to make savings internally – including 10,000 job cuts and the closure of both an R&D centre and a factory in Finland. But Microsoft will be thinking about number one, and with the launch of Surface, its own hardware for the tablet version of Windows 8, and the desire to get the operating system on as many laptops and PCs as possible, Nokia will not be its top priority.

Also, Nokia won’t be the only manufacturer creating handsets running Windows Phone software. Even with its special relationship with Microsoft, the likes of HTC and other manufacturers will be just as important in making sales and spreading the word of Windows 8 as Nokia, as well as receiving the boost from Microsoft’s marketing.

One of the few glimmers in Nokia’s results was its steady feature-phone business, which grew 2% year on year and shipped 73.52 million devices and, while having much lower margins than high-end smartphones, still keeps the high shipment volumes Nokia will need to keep its head above water.

As smartphone prices come down and emerging markets look to bigger, brighter handsets, feature phones may start to dwindle. But, while the market is still there, should this not be something to invest heavily in, rather than throwing money at high-end iPhone competitors that rarely win the battle? Or maybe the focus should be on Nokia's low-end smartphones and making them a competitive alternative to feature phones?

Elop should beware of putting all his eggs in the Microsoft basket. It may pay off in the end but it is a risk Nokia might not be capable of taking if they want to see many more second quarters.