Nokia’s Windows Phone Transition Could Be Rough

Did Nokia make a mistake when it sided with Windows Phone over Android?

That’s the question apparently on a lot of minds, following Nokia’s stock plunge and some analysts’ pessimism about the company’s ability to hold off an all-fronts assault by Google Android and Apple’s iPhone. While Nokia recently signed an agreement with Microsoft to port the latter’s Windows Phone software platform onto its hardware, the resulting smartphones will likely not arrive on store shelves until the fourth quarter of this year — placing Nokia in a somewhat vulnerable position as rival devices continue to flood the market.

Customers flee Symbian

Following its transition to Windows Phone, Nokia will abandon its homegrown Symbian operating system. That could be causing the current dip in Symbian handset sales, as customers flee the platform in favour of one with continuing support.

“We would continue to avoid the stock as Symbian smartphone sales are falling off faster than expected and we are skeptical that new Windows Phone (WP) models will be able to replace lost profits,” Stephen Patel, an analyst with Gleacher & Company, wrote in a May 31 research note. “Our checks suggest mixed carrier support for Nokia’s transition to WP.”

Android is also threatening Nokia’s traditional stronghold in lower-cost handsets. “We think sub-$200 Android handsets, including those from new entrants such as ZTE and Huawei,” he added, “are hurting Symbian units, which largely target the same price range.”

To top things off, Patel seems concerned about Windows Phone’s ability to replace Symbian’s market presence as the latter transitions to the dustbin of dead technology: “We remain concerned that WP industry sales remain below 2mil units/quarter and that [Nokia’s] scale will not be enough to offset a faster-than-expected drop-off in Symbian phone sales.”

Other analysts have pointed to the transition period as cause for concern.

“While we maintain our belief the Nokia-Microsoft partnership is best positioned to potentially create a third viable smartphone ecosystem,” Canaccord Genuity analyst Michael Walkley wrote in a June 1 research note, “we are increasingly concerned about sales for Nokia’s Symbian devices during the transition period.”

A risk that could pay off

Nokia itself had publicly acknowledged the risks associated with the Microsoft deal in its Form 20-F 2010 report. “If we fail to finalise our partnership with Microsoft, or the benefits of that partnership do not materialise as expected, we will have limited our options and more competitive alternatives may not be available to us in a timely manner, if at all,” read one section. “Our expected transition to the Windows Phone platform may prove to be too long to compete in the smartphone market longer term.”

In the wake of the partnership announcement, some analysts had taken a positive view, suggesting that Nokia’s reach and Windows Phone’s unique user interface could combine to create something of a powerhouse. Research firm IDC suggested in March that Nokia-propelled Windows Phone could surpass BlackBerry and iOS to become the second-ranked smartphone operating system in the world by 2015.

However, Microsoft’s share of the smartphone market continues to dip — at least according to research firm comScore — while The Nielsen Company recently suggested low consumer interest in Windows Phone. And Nokia announced on 31 May that its handset sales and second-quarter earnings are in decline.

In other words, the two companies could still benefit from their partnership — after what looks to be at least a few rough quarters of transition.