Nokia and Microsoft are to team up to take on Google and Apple in the fast-growing smartphone market.
As part of the deal, Nokia will adopt Windows Phone as its primary smartphone platform, with its current operating system, Symbian, moved to a franchise platform.
The move is expected to result in significant job cuts at Nokia, as research and development spending is reduced.
Microsoft's search engine Bing will power searches for Nokia, and its AdCenter platform will provide search advertising services.
Nokia's mapping software, meanwhile, will become a "core part" of Microsoft's mapping services, integrated into the Bing search engine and AdCenter advertising platform to deliver local search results.
Nokia's content and application store will be integrated with Microsoft Marketplace.
A partnership between the two companies has been rumoured for some time. Nokia chief executive Stephen Elop told a press conference today that the company had explored other options, including adopting Android and internal systems such as MeeGo as its primary platform, but said Microsoft's Windows Phone 7 platform would give it a "faster path" to the US market.
The partnership with Microsoft is aimed at helping both companies claw back ground lost to Google's Android software and Apple's iPhone at the high end of the market.
"This now a three-horse race," Mr Elop said.
Microsoft chief executive Steve Ballmer said Windows Phone 7 had received great reviews and feedback, and "strong engagement" from developers had seen more than 8,000 application developed for its Marketplace.
In an open letter from Mr Elop and Mr Ballmer, the companies said the partnership would increase scale, and would result in significant benefits for consumers, developers, mobile operators and businesses around the world.
Nokia said it still intends to sell Symbian devices, and predicted sales of 150 million "in the coming years".
Mr Elop signalled that there would be significant job cuts in the wake of the partnership, although he did not speculate how many employees would be affected.
Nokia's share of the fast-growing smartphone market plummeted to 27.1 per cent last quarter from 50.8 per cent when Apple shipped its iPhone in June 2007, according to Gartner. The company has lost more than 60 per cent of its share value in that time.
Sales of the Finnish company's low-end mobile phones, which make it the leading seller in markets like China and India, fell 10 per cent year-over-year in the quarter.
Microsoft, whose Windows Mobile software licenses were doubling annually before the iPhone hit the market, has likewise struggled to win acceptance for its revamped Windows Phone 7 software. The software maker said it shipped more than 2 million licenses for the new smartphone system in its first quarter on the market.
Nokia said today it targets 2011 Devices and Services non- IFRS operating margin of 10 per cent or more.
Mr Elop (47) was hired away from Microsoft in September to put Nokia on a comeback plan, especially for software, the biggest point of difference in smartphones. He made only small adjustments in his first months as he reviewed the business. He announced 1,800 job cuts in the workforce of more than 120,000, adjusted the development process for the Symbian smartphone code, and appointed a new marketing chief, Jerri DeVard.
Since Mr Elop became the first non-Finn to head Nokia on September 21st, Google's Android software has become the biggest smartphone operating system, passing Nokia's Symbian, according to Canalys and IDC analysis of shipments. The company's N8 smartphone with the revamped Symbian 3 operating system was greeted by analysts as an improvement, although not enough to reverse the slide.
Both Moody's and Standard and Poor's put the company's debt on review for a downgrade after fourth-quarter net income fell 21 per cent and the company signalled margin pressures. The ratings agencies said the numbers pointed to a further loss of competitiveness in the crowded smartphone marketplace.
Android, which is supported by mobile manufacturers including Samsung, HTC and Sony Ericsson, offers users a slick interface similar to the iPhone for a lower cost of ownership.
Android phones typically have more flexibility in data plans than the iPhone, and make it easy to use virtual calling programmes like Skype that reduce monthly bills. The system has proven popular with app developers who have built its Android Market up to more than 100,000 download items.
Google chief executive Eric Schmidt said last month that his company is activating more than 300,000 phones a day.
Additional reporting: Bloomberg
