Nokia said using Microsoft's Windows Phone software in its smartphones would speed up new product launches, but shares in the world's largest cellphone maker fell sharply on uncertainty about the financial impact of new chief executive Stephen Elop's strategic u-turn."It is now a three-horse race," said Elop, who was drafted in to head Nokia from Microsoft last September.
Elop said the partnership would mean job cuts around the world, while research and development spending would also be slashed.
The deal with Nokia marks a major breakthrough for Microsoft which has struggled for years to establish itself in wireless.
But investors were unconvinced by Elop's new strategy and Nokia shares tumbled 10 percent after Nokia said 2011 and 2012 would be "transition years," fuelling fears of a negative impact on margins.
Nokia said its operating margin would be "10 percent or more" after the transition period, compared with a margin of 7.5 percent for 2010.
"Given that the people who were positive on the stock were looking for mid-teens devices margins by 2012, we can see some cuts to estimates," Richard Windsor, global technology strategist at Nomura said.
Nokia has rapidly lost share in higher-margin smartphones as Apple's iPhone, and products based on Google's Android platform, have revolutionized the market.
Although Microsoft's Windows Phone platform, which had a 2 percent market share in the last quarter, is widely recognized by industry experts as a leading edge technology, it has not yet caught the imagination of consumers.
The decision to throw its lot in with Nokia could put others off using its software, but analysts said that on balance it was Microsoft that would gain most from the deal.
"I do not see LG, Samsung, HTC carrying on with Windows Phone. They are betting everything on (Google's) Android. Nokia's obviously going to have a much deeper integration than the others," said Carolina Milanesi, handsets analyst at IT research firm Gartner.
FEAR FACTOR
Nokia, which has struggled to create a rival to Apple's iPhone phenomenon, is now watching smaller competitors like HTC Corp and Motorola hook up their smartphones to Google's Android software and lure customers around the globe.
"This is a partnership born out of both parties' fear of marginalization at the hands of Apple and Google but there is no silver bullet," said analyst Geoff Blaber from CCS Insight.
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