New mobile competition drove Nokia, Microsoft deal

New competition in the smartphone market - and not just from Research In Motion - spurred the agreement between Nokia and Microsoft.

On Wednesday, the companies announced they will develop Microsoft Office, business communications, collaboration and device management software for Nokia's Symbian phones. They said that the agreement was designed to challenge RIM.

"Even though they've pitched this against RIM, I think it's more about Android and Apple as the new competition," said Kitty Weldon, an analyst at Current Analysis.

"There's more momentum behind the iPhone and to some extent the Palm Pre, and everyone is talking about Android as the next great thing."

Jack Gold of J. Gold Associates also said the deal will help the companies compete.

"It may ultimately blunt some of the market advantage that BlackBerry has in the enterprise, and may also thwart some of the up and comers (e.g., iPhone, Android, Pre)," he wrote in an analysis of the agreement.

Neither Microsoft nor Nokia has done particularly well in the face of the new competition. Windows Mobile has lost market share this year and Nokia recently reported declining earnings, with an expectation for its market share to remain the same as last year.

The deal could give both Microsoft and Nokia more leverage against the competition. It will also give end-users more choice of phones running Microsoft programs, but might present challenges to third-party companies already offering access to those programs.

End-users, particularly business users who want access to Office products, will have more choice of phones once Nokia phones start appearing with the Microsoft software. Currently, Windows Mobile devices are the only phones with Office software, although third parties supply Office viewing and editing products for most phone platforms.

That means the deal may help Nokia attract business users, despite largely unsuccessful attempts to do so in the past. Nokia bought and then discontinued an enterprise push e-mail offering from Intellisync.

It has also launched a business channel program aimed at helping resellers and operators better target enterprises and introduced families of phones aimed squarely at business users, including some that look very much like the BlackBerry.

But those efforts have failed to pay off. Nokia may have decided that it should focus on the larger consumer market and partner with other companies to pursue business users, Weldon said.

When it halted Intellisync's development, Nokia said it would partner with companies like Cisco Systems, Microsoft and IBM to deliver e-mail and business products.

For Microsoft, the deal might be more about shoring up its Office and Exchange products, which bring in a significant portion of its revenue, than about improving the fortunes of Windows Mobile.

"Microsoft knows it must protect these revenues by expanding the operation and connectivity of its key products, that until recently were primarily enabled on Windows Mobile and less functional or not available on competing platforms," Gold said.

Still, expanding products like Office into mobile likely won't be a significant revenue stream for Microsoft. "The Office market on mobile is a very different market just in terms of profitability," said Alan Masarek, CEO of Quickoffice, a company that makes software for viewing and editing Office documents on mobile phones.

Price pressure on mobile phones is just too strong for Microsoft to be able to demand any significant royalty from phone makers on its products, he said.

Microsoft might be going for volume, although the company declined to say whether this is an exclusive arrangement with Nokia. Experts have mixed opinions about the likelihood of the software giant striking similar deals with other phone makers.

Gold expects other deals to follow, probably first with HTC for its Android phones, followed by Palm and Motorola. "But Nokia was the key one to get things started and of course, they are the biggest," he noted.

Masarek was less certain. "It's hard to see Microsoft embracing a Google initiative," he said of the possibility of a tie-up with Android.

The new announcement between Nokia and Microsoft will surely affect Quickoffice sales to Symbian phones, once the new Microsoft applications become available on Nokia phones in a couple of years.

Masarek thinks he should be able to maintain a leg up because Quickoffice's newest products focus on enabling mobile access to documents stored online or on a user's computer.

But Microsoft and Nokia are likely to offer a similar service. "It sounds like a natural evolution," said Weldon.

"I would think that the Quickoffices and Datavizes of the world would be worried, no matter what they say," she said. Microsoft and Nokia did not specifically say what other products and services might appear in the future.

Dataviz has been mostly focused on products for iPhone, Android, BlackBerry and Palm devices, so the announcement shouldn't impact it directly, said Kathleen McAneany, business manager for Dataviz's Documents To Go for BlackBerry.

Those companies may have some time to make sure that they have a niche offering. Nokia said that the first application to appear will be Office Communicator, some time next year, followed later by other applications.