Microsoft, Nokia Join Forces On Windows PhonesMicrosoft, Nokia Join Forces On Windows Phones

Maybe he was a Microsoft plant all along. Just five months after leaving a senior position at Redmond to take the top job at the world's biggest cell phone maker, Stephen Elop has inked a broad, strategic alliance with his former employer that could provide a much needed boost for both companies.

Under a proposed partnership announced Friday, Nokia will adopt Microsoft's Windows Phone 7 operating system as the primary OS for its smartphone lineup—effectively ditching, at least for the higher-end of its lineup, the open source Symbian that for years had provided the backbone of its offerings. Nokia will also delay its next-generation MeeGo phone.

The companies cautioned that they have yet to hammer out a definitive agreement.

For Nokia, the move gives it access to a state-of-the art smartphone OS and frees it from having to spend billions of dollars of its own money to keep pace with cash-rich rivals Apple and Google in the phone wars. Among other things, Windows Phone 7 features Smart Tiles that push e-mails, IMs, and social network updates to the forefront of the user interface, and it ties directly into Microsoft Office and Exchange.

Nokia, though small in the U.S., still leads the cell phone industry in terms of worldwide market share. But analysts questioned whether the company could maintain that lead for long amid steep competition from the iPhone and Android-powered devices.

As for Microsoft, the deal gives it instant access to the world's largest installed base of smartphones and Nokia's global distribution and billing network. Microsoft had become an also-ran in the phone market, domestically and abroad, despite the launch of Windows Phone 7 last November. Canalys analyst Pete Cunningham called the pact "a huge win for Microsoft."

Indeed, the company is clearly hoping the tie-up with Nokia will change its sagging fortunes in the phone market.

"I am excited about this partnership with Nokia," said Microsoft CEO Steve Ballmer, at a news conference in London. "Ecosystems thrive when fueled by speed, innovation, and scale. The partnership announced today provides incredible scale, vast expertise in hardware and software innovation and a proven ability to execute."

Nokia CEO Elop said the arrangement would add a host of new tools and services to his company's sleek handsets.

"Today, developers, operators, and consumers want compelling mobile products, which include not only the device, but the software, services, applications, and customer support that make a great experience," said Elop.

In addition to the Windows Phone 7 OS, Nokia devices will carry Microsoft Bing as the default search tool, which will be integrated with Nokia Maps. Nokia users will also get access to Microsoft's Application Marketplace, and publishers and advertisers on the Nokia platform will be able to use Microsoft's AdCenter tools.

The deal isn't without risk. There's a chance that the pairing of two companies that on their own have lost luster in the phone market won't fix their problems. Windows Phone 7 is virtually unknown outside the U.S. and even in Microsoft's home market it's still just a blip in a smartphone market dominated by Apple, Google, and RIM. CCS Insight analyst Geoff Blaber said the arrangement is "a move born of desperation."

The alliance with Microsoft is part of a broader shakeup at Nokia engineered by Elop that includes a significant management shuffle and splitting of the company into two separate organizations. The Smart Devices group, to be led by Jo Harlow, will focus on high-end smartphones. The Mobile Phones unit, which will be under Mary McDowell, will concentrate on mass market devices for developing markets.

Nokia's restructuring is set to take effect April 1.