Windows Phone 8 announcement puts partner Nokia in tough spot

With new OS coming in the fall, sales of Nokia's current Lumia smartphone line could be hit hard

Microsoft made important headway in its bid to compete in the smartphone market this week, announcing the next-generation Windows Phone 8 smartphone operating system. But in the process, the company has "placed their hardware partners in a very awkward situation," says Wayne Lam, IHS senior analyst in wireless communications.

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MORE: Microsoft previews Windows Phone 8

Windows Phone 8 is Microsoft's first mobile operating system based on the Windows NT kernel. In addition to the ability to run multi-core processors and take advantage of higher-quality graphics, the upgrade from the legacy CE kernel means that Windows users could have the same fluid experience across their PCs, tablets and smartphones.

"With Microsoft's announcements this week they really have brought clarity and focus to their mobile OS ecosystem," adds Lam. "Where they were kind of all over the place before, now we kind of see their cards, so to speak, and it's a pretty exciting week for their announcements."

The move may have also caused some collateral damage. Unlike Apple's iOS, Windows Phone 8 will not be available as an upgrade for older smartphones running Windows Phone 7; anyone who wants the OS will need to purchase an entirely new device running it.

Lam says Microsoft "basically cleaved off all existing Windows Phone 7.5 devices," effectively nullifying existing versions of the Nokia Lumia, the current flagship product of its primary smartphone manufacturing partner. Although Microsoft is offering the ability to upgrade to the new Windows Phone 7.8, the decision will shorten the Lumia's shelf life to about nine months, Lam says.

"Nokia is already having a tough time building market momentum behind their Lumia line, and now to basically have Microsoft signal to the market that they might as well stop thinking about purchasing Lumia because they're going to have something new in October, it sets up for a difficult sales cycle for Nokia moving on," Lam says.

The Windows Phone 8 announcement wasn't Microsoft's only move this week to have repercussions in the OEM community. On Monday, when Microsoft introduced its internally manufactured Surface tablets, analysts predicted fallout from OEM partners who would now have to compete against Microsoft while also paying to license Windows 8 for their own tablets. Roger Kay, principal analyst at Endpoint Technologies Associates, said in an interview with IDG News Service that he believes Microsoft's manufacturers "are fairly discontent" about the move from Microsoft.

"The tablet is the heart and soul of Windows 8, and it looks like Microsoft has reserved it," Kay said.

Similarly, Lam says "with the Surface announcements, [Microsoft] basically said to their traditional PC manufacturers making tablets based on Windows 8 that 'this is how you do it right.'"

However, the political squabbles will be a minor bump in the road for Microsoft, say analysts. Earlier this month, IDC released a report that reiterated its previous predictions for Windows Phone to assume the No. 2 spot in the smartphone race, and forecasted a 46% compound annual growth rate from 2012 to 2016. Google's Android, Apple's iOS and Research In Motion's BlackBerry are all expected to lose market share during that time, IDC said.

Even after the Windows Phone 8 announcement, which Lam says "kind of resets everything," IHS predicts similar gains for Microsoft in the smartphone market. Although the firm pegs Windows Phone for the third position in the market by 2016, behind Android and iOS, it forecasts Microsoft's smartphone OS market share to grow from 35 million device shipments in 2012 to more than 150 million in 2015. Nearly all of this success, according to both firms, hinges on Nokia's performance.

IDC included in its report that it only predicts such large gains for Windows Phone "assuming Nokia's foothold in emerging markets is maintained."

Lam, meanwhile, suggested Nokia is Microsoft's only reliable partner. Samsung has built up such a strong following with its Android devices that it doesn't need to devote too much time, effort or money into a platform that is still building a following. HTC has been proactive in its adoption of Windows Phone 8, with plans for three WP8-based smartphones with 4-inch screens or larger, according to The Verge. However, HTC recently experienced a 35% year-on-year drop in revenues, because of which Lam "doesn't think they're going to be leading a lot innovation." And although Huawei has announced its support for Windows Phone 8, it's too early to tell how involved it will be.

Support from such a diverse group of manufacturers bodes well for Microsoft, as does its recent progress in building a mobile app community. Windows Phone recently reached the 100,000-app milestone, and just this week gained two of Zynga's most popular apps, Draw Something and Words With Friends. With that, Microsoft continues to patch one of Windows Phone's biggest faults, and makes it more appealing to an ever-increasing smartphone market.

"Now that Microsoft finally has a coherent ecosystem behind Windows Phone 8 as well as Windows 8, the overall platform will start to accumulate momentum," Lam says. "It'll probably outpace the folks behind it, such as BlackBerry, so in that sense we fully expect Windows Phone 8 to gain market share, and the leader in that space is going to have to be Nokia because they're the ones that are all in on this platform."

Colin Neagle covers emerging technologies, privacy and enterprise mobility for Network World. Follow him on Twitter @ntwrkwrldneagle and keep up with the MicrosoftCisco (@ciscosubnet) and Open Source community blogs. Colin's email address is cneagle@nww.com.

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