Nokia, Microsoft in Talks for Windows Phone 7? (NOK, INTC, MSFT, AAPL, GOOG, RIMM)

The troubles that Nokia Corp. (NYSE: NOK) has had getting a worthy competitor into the smartphone market are pretty well documented. The company’s N8 smartphone was released after many delays in early October with Nokia’s Symbian-3 operating system, a reworking of the venerable Symbian OS that Nokia has used for years.

The N8 and the company’s first touch screen phone, the E7, have been slated to get a software upgrade to the Meego operating system, developed jointly by Nokia and Intel Corp. (NASDAQ: INTC), but that OS is also late. At least according to Russian tech blog Mobile Review.

Russian blogger Eldar Murtazin apparently has a good track record on all things Nokia, and he reports that Nokia has been holding quiet discussions with Microsoft Corp. (NASDAQ: MSFT) to incorporate Windows Phone 7 into an entire line of smartphones that would be marketed by Nokia. If this is true, it may be Nokia’s last and best chance to penetrate a market dominated by the iPhone from Apple Inc. (NASDAQ: AAPL), the Android operating system from Google Inc. (NASDAQ: GOOG), and Research in Motion Ltd. (NASDAQ: RIMM).

Since my Russian is a little rusty, here’s what Google Translate has to say: “This is a desperate measure of the two companies. The last step for the salvation of Android, which crushes everything in its path.” The translation probably got its prepositions scrambled and that second sentence should read “salvation from Android.”

But a tie-up between Nokia and Microsoft is not only a savior for Nokia, but it could be a savior for Microsoft’s mobile hopes. Nokia’s new CEO, Steve Elop, came from Microsoft’s Business Software division, and turning to Redmond for a solution that has eluded Nokia doesn’t seem all that far-fetched. But Elop’s expertise is not in mobile operating systems, and it’s likely that Nokia’s software engineers are going to resist giving up on Symbian and Meego.

Whether or not the discussions have been going on, this revelation is sure to cause discord and worry at Nokia, where the corporate culture is very insular and the new CEO is the first outsider ever to run the company.

That’s not what Nokia needs right now. It needs to focus on making spectacular product that will compete with Apple and the Android smartphones. Switching to Microsoft’s mobile platform now will only delay such a product further. Even rumors of a switch will slow things down.

As for Microsoft, it has nothing to lose by talking with Nokia. The world’s largest software company could easily make an offer that Nokia would find hard to refuse — say, free, or at least very cheap to Nokia and very expensive for Microsoft.  Microsoft is not known for its generosity, but if it wants to get any sort of meaningful piece of the smartphone market, it needs to do something big, like grab Nokia’s OS business.

If the talks are happening, and if they fail, Microsoft goes to Plan D or so, and Nokia has just wasted more time. If the talks bear fruit, Nokia could lose its independence and waste even more time getting to market. And all Microsoft really gets is a PR victory because any Nokia/Microsoft phone wouldn’t hit the market until 2012, at least.

An agreement between the two companies is very much a desperate measure. It is so desperate, in fact, that it’s difficult to see how either company would gain much, even if the deal is done.

Paul Ausick