[By Duncan McLeod]

The intense competition and rapid innovation in the smartphone market have forced two of the industry’s biggest players to team up. Microsoft and Nokia last Friday outlined a partnership aimed at keeping them relevant. Can Microkia succeed?

New Nokia CEO Stephen Elop’s no-holds-barred memo to employees last week, in which he warned that the Finnish handset manufacturer was standing on a “burning platform”, was unusual for its being so frank and harsh. It set the stage for Elop’s announcement, with Microsoft CEO Steve Ballmer, that Windows Phone 7 would become the primary operating system platform for Nokia’s smartphone portfolio.

The tie-up with Microsoft represents a dramatic turnaround for Nokia, whose executives had steadfastly insisted that its ageing (and tired) Symbian operating system platform and the newer but untested MeeGo software were the main focus areas of its strategy to catch up with Apple’s iPhone and devices running Google’s Android.

Now Elop, a Canadian and a former Microsoft executive, has warned that unless Nokia steps up the pace of innovation and develops a powerful “ecosystem” around an operating platform, then its slide into irrelevance will continue.

Despite being the largest maker of cellular phones in the world by some distance, Nokia is coming under intense pressure — at the low end from Chinese manufacturers and in the premium segment from a host of competitors, especially Apple and Google. Rivals have been running ever-tighter rings around Nokia, which has been behaving like the proverbial deer in the headlights.

The company is still a powerful player in the smartphone market, but not as powerful as it once was. Its market share has been steadily eroded in recent years as Symbian has failed to keep pace with innovation in the industry. The tie-up with Microsoft is meant to “create the opportunity for rapid time-to-market execution”.

In many respects, though, the deal looks better for Microsoft than it does for Nokia. Until recently, Windows Phone (previously Windows Mobile) had fallen far behind rival platforms. Now, Microsoft is mounting a battle to regain lost ground, recently overhauling the Windows Phone software.

But Microsoft has been reliant on third-party handset manufacturers such as Samsung and HTC, many of which have switched allegiance to Android, or are developing their own smartphone operating systems — Samsung with Bada, for instance, or Hewlett-Packard with WebOS.

With Nokia, Microsoft finally has a handset manufacturer — and the biggest one there is — adopting its software platform. Nokia may have just saved Microsoft from irrelevance in the increasingly important smartphone market.

It’s less clear what Nokia wins from the deal. Yes, it now has access to (but doesn’t own) a modern smartphone platform in Windows Phone 7 and, yes, with Microsoft it probably has a better shot at creating a third mobile ecosystem that has critical mass, alongside iOS and Android. But it’s also tying its future to a software company that, let’s face it, hasn’t had much success expanding from its personal computer roots.

Whether the Microsoft deal was the right one for Nokia, only time will tell. Nokia shareholders don’t appear too hopeful, sending the company’s shares down more than 15% after the tie-up was announced. But who knows? Perhaps in the case of Microkia, one plus one will add up to three.