Should Nokia Adopt Android or Windows Phone 7?

With dwindling market share for Symbian and growing smartphone competition may force Nokia (NOK) to adopt either Google's Android Operating System or Microsoft's Windows Phone 7 in a bid to regain its lost marketshare in the smartphone space.

Market observers have been speculating for some time that the mobile phone giant should adopt third-party software on its phones to recapture its narrowing share of the smartphone market, especially in the United States - one of the world's largest markets for smartphones.

Recently, Google's Andy Rubin has expressed his hopes that Nokia will eventually adopt Google's OS. Rubin's comments at San Francisco's D:Dive Into Mobile earlier this week triggered rumors that Nokia is currently considering jumping onboard with Android, amid poor sales figures in the US.

When asked as to whether Google had discussed Android adoption with Nokia, Rubin said: I'm not going to talk in detail, adding,I think the company has new leadership and they are evaluating what their options are ... I'm a big proponent of Android and I hope they adopt it.

Finland-based Nokia, which competes with Apple, Samsung, Research in Motion (RIMM) in the smartphone arena, has seen market share declines and higher operating costs.

The worlds' largest handset maker has been slow to adapt to the smartphone revolution in the U.S., which has been led by Apple's (AAPL) iPhone and Google (GOOG) Android devices. Ever since the iPhone was launched in 2007, Nokia has witnessed a steady erosion of its smartphone market share.

The company's share price has also fallen by almost two-thirds since the iPhone was launched in 2007, wiping about 60 billion euros off the group's market capitalization. Nokia's insistence on designing and selling its devices without operator input, despite the strong presence of wireless carriers like Verizon (VZ) and AT&T (T) in the U.S., has prevented it from gaining traction in the world's largest smartphone market.

In 2006, Nokia controlled 20 percent of the U.S. market. That number has now dwindled to little over seven percent, triggering concerns from investors. Strategy Analytics analyst Neil Mawston said first and foremost is, Whether Nokia really has the desire to fix the problem.

For instance, though Nokia unveiled three smartphones -- E7, C7 and C6 -- that run on its Symbian 3 platform at the company's annual Nokia World conference, not a single one will be offered by a U.S. carrier.

Also, the company's flagship model N8 -- touted as Nokia's answer to the iPhone -- is also not being offered by a U.S. carrier, thereby questioning the seriousness of Nokia's intentions about re-entering the U.S. market. In the U.S., customers will have to buy N8 unlocked and then buy a separate SIM card.

While Nokia retails unlocked devices in the U.S. either directly through its Web site, through Nokia stores, or through resellers, those avenues would not match the volumes offered by the operator retail channel.

One of the Nokia's problems is that it made its products on a global perspective rather than making market specific devices. As a result, Nokia has been slow in launching premium devices to battle high-end rivals like Apple's iPhone and new Android-based phones like Samsung's Galaxy S.

With GSM phones, Nokia will be able to have only AT&T and T-Mobile customers. AT&T has 90 million subscribers and T-Mobile serves 38.5 million subscribers.

Market observers say that Nokia last enjoyed success in 2006 when it launched N95, a smartphone with mass appeal.

Also, Nokia is still keeping its strategy of using three operating systems -- S40, Symbian, and Meego.

Meanwhile, rivals are busy catching up on Nokia's main Symbian platform. According to Gartner, Symbian's market share is expected to drop to 34 percent in 2011 from 40 percent in 2010, while Google's Android is forecast to rise to 22 percent in 2011 from 18 percent in 2010. Apple's iOS is likely to grow to 17 percent in 2011 from 15 percent in 2010.

Stock analysis firm Trefis said Nokia's market share in developed mobile phone markets (US and Europe) has declined from 30 percent in 2007 to 27 percent in 2009, and could continue to decline to around 20 percent by the end of its forecast period.

Increased competition from Apple iOS, Research in Motion BlackBerry OS and Google Android, has hindered the ability of Nokia Symbian to establish itself in the US and Europe. Nokia's attempts to make a comeback in the US have continually been met with software problems and operating system launch delays.

Nokia's Symbian 3 OS was originally scheduled for launch during the second quarter of 2010, but was ultimately pushed to third quarter 2010.

Similarly, Nokia's N8 smartphone was released in October following a delay earlier this year. More recently, the company's E7 has been re-scheduled for launch in early 2011, instead of the original target before the end of 2010.

The delays indicate that Nokia will be playing catch up with the rapidly changing trends of the mobile phone industry. Timely launch of the latest operating systems from competitors like Apple's iOS 4, RIM's BlackBerry OS 6 and Android Gingerbread will put pressure on Nokia.

Android Adoption

In this scenario, Nokia, which has seen its market share decline and expenses increase at a steep rate over the last few years, may be looking to adopting Android. Its market share has suffered in the past due to the software problems that have caused delays in bringing out new versions of its Symbian operating system and smartphones.

Trefis, whose price estimate for Nokia stands at $12.44, said there could be a potential gain of 15 percent to its estimate for Nokia stock from adoption of Android.

We believe that if Nokia adopts Android, the company will not only reduce operating expenses that it incurs in development of new versions of Symbian, thereby boosting margins, but will also benefit from the success of Android, which has seen rapid adoption over the past year, Trefis said.

Trefis said if Nokia adopts Android, the Finnish giant could stand to gain market share, as Android adoption has increased rapidly over the past year. In addition, Nokia could save on R&D and selling, general and administrative expenses (SG&A) that it incurs on developing and maintaining different versions of Symbian.

Android market share has rapidly risen to around 26 percent during the third quarter globally, compared to just 3.5 percent in the same period last year. On the other hand, Symbian's share has declined from around 45 percent to around 37 percent in the same period.

Various handset makers like Motorola and Dell have already adopted Android.

Also, by adopting Android, Nokia can get better carrier traction as well as benefit from the surging apps being developed for Android.

If Nokia is able to maintain its share at 27 percent in the developed markets throughout the Trefis forecast period, there could be upside of 5 percent to its estimate for Nokia stock, Trefis noted.

Nokia's operating margins have declined at a rapid rate from around 20% in 2007 to 13% in 2009, and we expect it to continue to decline to 8% by the end of Trefis forecast period.

If Nokia can reduce Symbian R&D and SG&A expenses, its margins could also get a boost.

Trefis said there could be an upside of almost 10 percent to its estimate of Nokia stock if operating margins for developed market mobile phones remain constant at around 13 percent throughout its forecast period.

Windows Phone 7 Rumor

Meanwhile, there were rumors that Nokia is looking to partner with Microsoft (MSFT) on a new line of handsets that would run on Windows Phone 7.

Mobile industry watcher Eldar Murtazin reported in his weekly review that Nokia and Microsoft have been in talks in the last month to bring Windows Phone 7 to Nokia phones, and Nokia's new CEO, Stephen Elop, has initiated the negotiations.

Interestingly, Stephen Elop, was previously an executive at Microsoft overseeing the company's Office suite of programs.

However, technology blogger and consultant Julien Fourgeaud thinks a partnership between Nokia and Microsoft is unlikely to happen.

Nokia has always been trying to stay out of the licensing model because it's too expensive, Financial Times Quoted him as saying. They produce huge volumes of phones, so licensing would increase the cost per unit.

Meanwhile, Nokia has giving significant importance to Qt, a cross-platform framework for app developers that acts as alternative application environment to Symbian. However it not known whether Qt would be compatible with Silverlight, the developer environment for Windows Phone 7.

Stock Performance

ADRs of Nokia were currently 0.10 percent higher at $9.94 and the company's market cap stood at $37.22 billion.

In the past 52-weeks, they have been trading in a range of $8 to $15.89.