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“The world just changed today.” So proclaimed Microsoft CEO Steve Ballmer, as he and Nokia CEO Stephen Elop shook hands on the partnership intended to take on the runaway success of Google’s Android OS.

Ballmer and Elop described the smartphone market as a three-horse race – iPhone and Android may be in the top two places, but Windows Phone 7 with the backing of the world’s biggest phone manufacturer could just change that. (Only three? What about BlackBerry?)

The question is, can two of the most prolific non-success stories in smartphones really combine to be more than the sum of its parts?

Each company has complementary strengths that could work really well together: Nokia’s comprehensive Ovi Maps offering would shore up Microsoft’s rather limp-wristed Bing Maps; Microsoft’s strongly supported app marketplace would integrate Nokia’s teeny Ovi Store.

Microsoft brings its pedigree in search, e-commerce, the Xbox integration and Office business features, while Nokia offers expertise in sat-nav, mapping and local advertising. Sounds like the result is going to be the perfect superphone, right?

Except that Windows Phone 7 hasn’t really gotten the mainstream traction it needs, and Nokia hasn’t been known for sexy hardware since its superslim candybars in the 90s. “This is a “make-or-break” strategy by both Microsoft and Nokia,” says David McQueen, principal analyst at Informa. “There is no question that this partnership will provide scale for Microsoft which has been struggling in the mobile world since the beginning.”

The most interesting thing I find about this partnership – considering that Nokia will hardly be the only manufacturer to make Windows Phone 7 devices – is that Nokia IS the only one that can customise the OS, and skate under the hardware requirements Microsoft has set for its other partners, LG, Samsung and HTC.

‘Can we customise everything?’ asks Elop rhetorically. Well, yes, but he then qualifies it by saying they probably wouldn’t. It’s a tricky balance Nokia faces – to increase chances of WP7 mass adoption, the OS can’t fragment just yet, so Nokia can’t customise its devices as much as it might want to in order to achieve differentiation within the Microsoft ecosystem. And for that matter, against iPhone and Android.

Part of Android’s market domination comes from the fact it’s available on the low-end and mid-range smartphones – the ones that make up a lot of sales. The problem with Windows Phone 7 is that it requires a high-cost smartphone to run properly. Meanwhile, Nokia’s forte has always been basic phones executed brilliantly – but even that has taken a hit in recent years from upstart Asian manufacturers like ZTE and Huawei.

Elop confirms a priority is pushing WP7 onto those lower-end devices as fast as possible. So Nokia is Microsoft’s way of cracking the low to mid smartphone market that Android has been so good with. On the flip side, Nokia hopes to then claw back the market share it’s been haemorrhaging, and help WP7 achieve critical mass.

Theoretically at least. Nokia software is nothing like Windows Phone and the transition will take at least a year. Investors are equally dubious, with Nokia shares dropping 9% in New York following the announcement. Guess for now the world remains as it is, and the three-horse race is going to be Android, iPhone and BlackBerry for a while.

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