2011 will truly be a unique and exciting time in the mobile space, something akin to the formative years of the personal computer era when the Mac, PC and a handful of other platforms battled it out for eventual supremacy.

In this context the Nokia- Microsoft strategic partnership, announced this month, is really a turning point in the smartphone narrative.  If executed successfully, this new alliance will change the mobile landscape, and in hindsight it will be seen as pivotal event that shifted the locus power in the mobile market.  But before we get to why, we need a bit of a background.

The iPhone re-invented the smartphone market (a market that seemed to be stagnated in the early 2000s with RIM, Palm and WindowsCE running out of steam) just over four years ago.  Although Apple is still the most dominant player in this new smartphone space, with the each new generation of handsets lacking further differentiation, the iPhone's first mover advantage is starting to wear thin.

That being said, the iPhone will be a major player for the next couple years at least, even if Apple doesn’t do anything else in the innovation department.  Yet, because the iOS is a closed system, it will very hard for Apple to satisfy all the different needs of all the segments of customers, who are quickly adopting other platforms as they catch up in feature parity and provide more choice (at least in terms of handsets and value add software features).  By locking out all the other hardware vendors, Apple’s iOS and hardware won’t be able to leverage the value and innovation throughout the value chain that is bound to evolve with such a large market.  Unless Apple changes the rules of the game yet again (and it did by creating a new billion dollar market with the iPad), it looks like the iPhone will crest at a penetration rate of around 5% of the total world phone market.

Google’s Android, on the other hand, has the most momentum coming in on 2011, with over 100 different devices out in the marketplace and over 50% of the new smartphones shipped (this is 2010 Q4 US smartphones only) based on the latest Gartner data.  However, with such a large and “open” ecosystem, the Android experience is starting to fragment and be inconsistent.   As the 80 or so hardware suppliers try to customise Android code with their additional software (which hardware designers seem to be incredibly bad at writing), Android seems to be following a similarly failed strategy that eventually doomed Windows Mobile.  With some handsets being incredibly slow, others mangled up with customs software and UI overlays, while others limited by apps that work or look inconsistent, Android is proving to be an mixed end-user experience.  Although it may seems contrarian at this point seeing that Android has all the buzz, the Google strategy is not entirely without flaws and is not unassailable, despite the retail channel being stuffed with Droid devices.

RIM and Nokia, on the other hand, seemed to be slipping into smartphone oblivion, with both the Blackberry and Symbian platforms looking as has-been’s, holding on in enterprises and the distribution channels largely because of long term contracts and channel relationships. RIM’s best chance at this point would be to latch onto Android somehow, possibly by allowing Android apps to run on its platform.  Otherwise barring a drastic rewrite and reintroduction of the platform, it seems RIM will continue to struggle and hang on as a niche brand in certain market segments, namely the corporate enterprise (surprisingly BBM seems to be popular with some university students as well).

Tactically, and in the short term, it would have made more sense for Nokia to go Google as the Android ecosystem is capturing the most mindshare along with vendor uptake . Strategically, it would have been a massive mistake, namely because it would shift power almost unilaterally up the supply chain to Google. 

By abandoning MeeGo and Symbian, Nokia would have to strategically give something up. The question is what would it be gaining in return?

If Nokia supported Android wholeheartedly it would have made the platform the de facto winner in the smartphone war, moving the locus of market power from the handset manufacturer to Android’s custodian, Google, while at the same time demurring Nokia down to the level of Samsung, LG and the commodity Taiwanese handset makers.   The Android ecosystem would be the predominant winner in the smartphone ecosystem; Nokia would get virtually nothing in return.  And ultimately, if Nokia floundered on Android, Google could care less, as it wouldn’t have much vested in the relationship.

The partnership with Microsoft would be staged at a much more even playing field, with the each company bringing complementary assets to the relationship (namely handset design and mapping software on Nokia's end, and a competitive smartphone ecosystem from Microsoft).  Nokia knew it had a better chance of both differentiating itself amongst the other handset manufacturers, as well and getting better terms from Microsoft, rather than Google, if it adopted the Windows Phone 7 ecosystem as its primary platform. All the while Microsoft knew it could not lose Nokia to Android or risk never catching up to Google in the mobile space; putting pressure on sweetening the Nokia deal.  By effectively creating a third alternative in the smartphone market, Nokia used the only card it had left, its global breadth and assets, with the most effectiveness.

The board at Nokia was prescient enough to realize that unless there were drastic changes, the company would slowly devolve into irrelevance along the lines of other industry giants who failed to realise the seriousness of their predicament.  As Nokia abandons its burning platform with a clear and appealing strategy, it all now comes down to tight execution.