Microsoft (NASDAQ: MSFT) won a huge victory today. Struggling handset company Nokia (NYSE: NOK), which is still the global leader in its industry, will use Redmond’s mobile OS in its smartphones. Nokia had considered using Google’s (NASDAQ: GOOG) Android system, but declined that route.

In a letter from Steve Elop, Nokia’s new chief, and Microsoft CEO Steve Ballmer the two companies argued for their decision. The key aspects to the partnership are :

“Nokia will adopt Windows Phone as its primary smartphone strategy, innovating on top of the platform in areas such as imaging, where Nokia is a market leader”  And:

“Nokia will help drive and define the future of Windows Phone.”

The first reaction from investors and the press will be that Nokia is so far behind Apple (NASDAQ: AAPL), Research In Motion (NASDAQ: RIMM) and Google Android powered smartphones that it cannot close the gap. Additionally, Windows Mobile has had almost no success as Microsoft has desperately tried to get smartphone companies to adopt it as their operating systems. Wall St. sold down Nokia’s shares by nearly 10% after the announcement

The marriage has two advantages which should not be overlooked. Nokia still has 32% of the worldwide handset market. It has faltered in smartphones, but surely its global foot print will give it some leverage with carriers. But, carriers are not customers and the real battle will be at the consumer level.

Windows Mobile has generally been reviewed as an adequate and sometimes good mobile OS. That has not helped it gain much market share. It is only used on 6% of smartphones in the US.

The real basis of any success for the joint venture is Microsoft’s ability to spend billions on marketing and R&D. That cannot be underestimated. The company’s Bing search engine has recently gained ground in the US. Microsoft was willing to invest billions of dollars in development and sales support for its Xbox game consoles at a time when Sony dominated the market.

Microsoft and Nokia may well build fine smartphones, but it is Microsoft’s extreme stubbornness which is the critical part to the future of the partnership.

Douglas A. McIntyre

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