The Nokia rumor mill is running hot again. This time Reuters is asking the same question we were all asking over year ago – will Microsoft buy out (or bail out) Nokia if things continue along their current path. When he took over the reins, CEO Stephen Elop likened Nokia’s situation to standing on a burning platform, and it appears little has changed since then.

He hasn’t exactly stood still since that time but many of his decisions have been met with derision from industry pundits and investors alike. Long before he came along the company was steadily diminishing and has now lost over 90 per cent of its value in five years. I likened Nokia to a sinking ship rather than the ‘burning platform’ Elop alluded to. Whichever way you look at it, this is a company in deep water, whatever the allusion.

The jury is still out on the decision to go with Microsoft Phone as the core device OS, but for those lucky or daring enough to experience the results of the union in the Lumia range of smartphones, most would agree it is quite a brilliant combination. But the general market does not seem to think so, at least the business end of it. Nokia’s Lumia range is seeing its greatest success where it is being heavily subsidized and then mainly appealing to a younger consumer profile.

Progress was not assisted by a glitch in the much-vaunted Lumia 900 that the press had great pleasure in exposing. The subsequent fix and rebates to those affected meant that the smartphones were being given away. Since that time, Nokia has announced price reductions on some of its other models, action that always sends the wrong message to the market.

Add to this Nokia’s part ownership of another leaking vessel, Nokia Siemens Networks, and you can see why the market has concerns about its long-term viability. Elop has fought hard to reduce costs within the company, has sold off pieces no longer needed and has closed assembly plants that are no longer cost competitive. He is constantly slashing employee numbers, although one doubts he is able to do that easily in Nokia’s home market where there exists intransigence to change that others involved in Finnish mergers will sadly confirm.

Thankfully for Nokia, and due solely, one presumes, to Elop’s previous history with Microsoft and his close relationship with its CEO Steve Ballmer, the latter is already paying Nokia $1 billion a year to use its software on Lumia smartphones. That’s a big investment, even for Microsoft, but it is predicated on Nokia selling lots of smartphones and paying a license fee back in due course. To date, the sales numbers are nowhere near those hoped for, so it brings into question just how long Microsoft will be wiling to support Nokia’s endeavors.

The recent news that LG would be dropping Windows Phone OS, later refuted by LG in favor of statement that its primary focus was Android, added extra weight on the shoulders of Nokia as the primary Windows Phone supporter. Whether the HTC decision was based on concerns about the Nokia-MS relationship, its dissatisfaction with the OS itself or the fact that Android handsets are more popular, no one will know. What it has done is cement any aspirations of global domination for Windows Phone squarely with Nokia, and this is why the market sees a Nokia acquisition on the cards.

These predictions may well come to fruition but Microsoft would have to think twice before diving in. Google’s foray into mobile hardware with the Nexus has been less than scintillating and its purchase of Motorola’s mobile division is yet to come into effect. Firstly, neither company has experience in selling hardware and neither has the distribution chain and relationships with operators that are needed for success. Both could buy their way into any market and subsidize handsets to gain market share but that could a very short-term strategy. Why would anyone subsidize a $600 handset to earn $20 – $30 in OS revenues?

In the case of Nokia, Microsoft simply cannot let it slip silently into the depths. It will do everything it needs to do without acquiring the company outright, maybe even taking a controlling stake. Nokia’s sinking would certainly be the death knell of Windows Phone and that is not an option that Microsoft will be willing to live with. For both Elop and Ballmer the next six months will be very testing and swimming lessons may well be in order.

First published at TM Forum as The Insider, 9 May 2012