CEO Elop Hints Nokia Will Be 1st To Windows Phone 8, Weighs In On China And Android

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Nokia’s Q2 earnings out today reflect the big challenges for the handset maker amid what CEO Stephen Elop calls the “ferocity” of competition from Android and Apple, but here’s a clue to one interesting development: he closed off today’s analyst call with a hint that Nokia will be the first handset maker to produce a smartphone on the future Windows Phone 8 platform from Microsoft.

Asked at the very end of the call if Nokia would make the first phone for Windows Phone 8, Elop would not answer directly, but said: “One signal [of what is coming] is that on the number of occasions when Windows Phone 8 has been demonstrated it has been on a Nokia device. We have a close relationship that is unlike what anyone else has with Microsoft.”

The comments were made in the context of Elop defending Nokia’s relationship with Redmond. Another analyst had pointed out that while it looked from the start like a very cozy friendship, more recently Microsoft has been announcing new products in mobile, seemingly with little regard for Nokia (Surface, anyone?). Steve Ballmer has said as much himself by touting how Microsoft worked with a variety of device makers.

Elop says no way: “We have established a preferred position with Microsoft in partnership — and also contractually,” (last part slightly ominously, IMO). He also noted that in fact Nokia “ourselves have been encouraging others to participate in the Windows Phone ecosystem, which needs energy, investment and hardware work because of the ‘ferocity’ of the competition with Apple and Android.”

And back to that contract: “We have an important relationship and dependency on Windows Phone [but] they have a dependency on us as it relates to the location partnership.” Microsoft uses Nokia location data, which comes in large part from its $8 billion Navteq purchase. These days Nokia’s location division yields very small returns compared to devices (just €283m in net sales on a quarter that saw €7.5bn in total net sales).

Other highlights from the call:

Patents. Elop has said it before and he’s mentioned it here again. The company is losing a lot of money as it continues to shift its product base over to Windows Phone (and hope that eventually lots more consumers bite). So its assets are coming into play big time. The company has a patent portfolio worth about $6 billion, which will likely be used as part of his strategy of “looking at other things to generate cash.” Also included will be more real-estate sales, which you might also read as possible further plant closures.

Confusion/frustration with Windows Phone 8 from Windows Phone 7 users. As you may already know, there is no upgrade path from one generation of the OS to the next. One analyst asked whether Nokia planned to “reward current Lumia purchasers with upgrades” to WP8 handsets to avoid some of that disappointment.

Elop didn’t answer that directly but noted, “Owners of existing devices do have upgrades and updates coming including some WP8 features like the start screen.” He also noted that since the WP8 announcement Nokia has actually noticed an uptick in the activation of Lumia devices.

He also said Nokia will continue to sell WP7 devices even after WP8 gets released and shipped. It will use this, it seems, as part of a segmentation strategy, most likely for targeting emerging markets: “You can achieve lower price points and do things [around] that.”

He also, unsolicited, decided to compare the WP7/WP8 situation to Android. “The last numbers I saw [on Android] were that north of 60 percent of devices sold were three versions older than the current OS. By and large those are not upgradeable, and yet sold the right way, there is clearly some volume. It is not the case that sales change, so we have to manage the cohesion of the platform well.”

On China and Nokia totally losing its leadership there to Android. Elop: “China is a unique market…where subsidized Android devices have gained a lot of momentum [at a time when] we were not in a position to offer [competing] devices with subsidies.” He mentioned the Lumia 610 — but frankly trying to stand one device up against a tidal wave of competing models seems to have only worked so far for one handset maker: Apple.

On carriers and the third ecosystem after Apple and Android. “This continues to be a very strong part of the conversation all over the world. In the U.S. for example it’s coming up and it is something we will continue to use going forward.”