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When John Sculley forced Steve Jobs out of Apple back in 1985, the former PepsiCo marketing executive very quickly produced dramatic improvements in Apple’s profitability.  Apple wasn’t losing money before, but Sculley improved the bottom line by about $200 million (a lot in those days) simply by cutting all of Steve Jobs’s pet projects that appeared to have poor prospects. Sculley raised profits by cutting expenses not by increasing sales. Expect the same thing at Nokia where, ignoring for the moment the “enormous payments” Microsoft will be making according to Nokia CEO Stephen Elop, the company can probably cut its software development budget to near-zero, saving $1 billion or more and increasing profits by that amount.

It’s one of those moments like when Cortez burned his ships to concentrate his conquistadores fully on their job of subjugating the Yucatan. Elop is burning his software development capability, betting on Microsoft. Sure, Symbian will be around for awhile in Nokia products, but two years from now it should be gone. And in that interim period, between lower development costs and Microsoft subsidies, Nokia will look better to investors even if its smart phone market share continues to fall.

That’s why Nokia did the deal with Microsoft, which will be assuming the burden of all that software development and paying Nokia for the privilege. It’s a short-term play that makes perfect sense in an industry where CEOs last an average of four years. Stephen Elop’s four years are now fairly certain, his golden parachute packed and ready.

Two years ago such a move would have been impossible in Europe simply because of employment laws making it very difficult to dump workers. But the current European financial crisis has changed that somewhat and Nokia’s obligations probably aren’t as onerous as they once would have been. Austerity is the thing these days in Northern Europe and almost everywhere else.

Now you might think I’d be against all this but I am not. Compared to Android and iOS, Symbian was, in a word, crap. We can have geeky arguments about it all day but the market has spoken loudly and I am right. Elop was right to make a platform change and righter still to do it this way, primarily at Microsoft’s expense. Nokia had to get out from under its bad software culture and this was by far the most elegant way to do it.

But having said that, I still don’t think it will work.

Trading Symbian for Windows Phone 7 with a $100 bill attached is still trading the worst smart phone platform for maybe the third best. With Blackberry retooling and coming up fast and HP’s WebOS as a dark horse backed by massive manufacturing capability, it isn’t at all clear that Nokia has selected a winner. Which is why I have some advice for Stephen Elop.

Nokia should put some of that Microsoft money into emulating Google’s Android development, where 25 programmers humbled the 1000+ working on Symbian. Hire a Bob Lee (or heck, hire Bob Lee), set up a small development office somewhere in the USA, and spend $5 million per year aiming at mobile life after Microsoft. By tying hardware and software as Apple has done with the iPhone and iPad (and Google, by definition, can’t do) Nokia can head Apple off at the pass with the equivalent of the iPhone 7, three years from now.

That’s what Nokia should do, but of course by then Elop will already by gone.

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Nokia today announced that the Finnish cellphone company is choosing Windows 7 Phone as the operating system for its future smart phones. It’s not a surprising move given that Nokia CEO Stephen Elop came from Microsoft and it’s not even that risky a move given that the alternative was a slow but certain death for Nokia smart phones running Symbian and Meego. Sure Nokia could have gone with Android, but Google has less at risk than Microsoft so Redmond had much more to offer. The only real question here is whether Nokia can make the new strategy a success?  I think they can, but there is only one way to do it — by rushing the net.

I’m no tennis player, but my understanding of this tactic (rushing the net) is that you hit deep into your opponent’s territory using a lot of topspin to make the ball harder to return then run right up to the net and attempt to slam his return shot into the forecourt while your opponent is still in the backcourt and unable to reach the ball. The Nokia version of this tactic would be to introduce the best-ever Windows 7 Phone (faster processor, better screen, expanded services, competitive price) then simultaneously introduce  another line of Windows 7 phones that have 80 percent of that capability for 20 percent of the price.

Nokia has already lost the elites but they have to make a credible showing toward the top of the market to stay in the game at all. This is one of those instances, though, where the company really can make it up in volume. They have to essentially cannibalize their own feature phone business to save the smart phone business.

Think about it. The life expectancy of a mobile phone is 18 months, meaning phone users are literally forced to change on a regular basis, often switching platforms in the process. Even buying another phone from the same vendor is a decision because the phones change so much in that time. That’s what makes the mobile handset business such a bloodbath where Motorola can be on top one minute with its Razr then a dog the next with the same phone. Phones are getting ever more powerful, too, thanks to Moore’s Law and the many cloud services coming online. So a Nokia decision to lean-into smart phones at the expense of feature phones is really just a decision to accelerate the inevitable.

Feature phones have one generation left to live. Three years from now every mobile phone will be a smart phone.

To embrace this, however, means going aggressively down-market. Apple has done this with the $49 iPhone 3GS. Nokia needs to do the same thing only even more aggressively. They need a $29 smart phone.

Here is the transition we are likely to see. Cheaper smart phones are coming. There was a story just this week about Apple announcing a cheaper smart phone this summer. I can see it now: at the WWDC in June Apple will announce the expected multi-core, 4G, international-ready, whiter-then-white, 1.2-GHz iPhone 5, but the “one more thing” will be a repackaged, smaller form-factor, $29 iPhone 3GS. Nokia has to not only have a response to this move by Apple, they must preempt it with an earlier announcement of their own.

Nokia (and Microsoft’s) survival in the phone market is dependent on staking out the lower end of the market where people buy on price as much as features and brand loyalty is less of an issue. Apple is heading there and Android is there already. Only by rushing the net — by following the time-honored Microsoft technique of throwing bodies and staggering amounts of money at a problem in a market-changing way — can these companies remain relevant in the mobile space.

But they have only one chance to make it work and they’ll have to take that chance before June.

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I want to make a small point here about this week’s Windows Phone 7 launch from Microsoft. Now you can take this with a grain of salt given that I was an iPhone user until I switched this summer to Blackberry for my Startup Tour. So I am not exactly unbiased. But is it just me or are you, too, having a hard time seeing the $400 million that Microsoft claims to be spending on this product launch?

Redmond spent $100 million launching Windows 95, a number that set something of a record for its time and stood for long as the standard amount to spend if big companies were trying to make a point based mainly on the depth of their pockets. For Windows 7 (not Windows 7 Phone) I recall Microsoft set a new record, blowing-through $200 million. So when I read that they’d be spending $400 million on Windows Phone 7 — now this was something I had to see. I expected to find a Microsoft billboard on my garage door.

Not yet.

Given inflation (remember that?) $400 million doesn’t buy what it used to, but I still expected Windows Phone 7 to be as omnipresent as Windows 95 or Windows 7. And it’s out there, but the effort simply doesn’t feel like $400 million worth of marketing oomph.

But maybe this just isn’t the kind of oomph we’re used to, I thought. Maybe Microsoft is putting half or more of the money into subsidizing the handsets. If that were the case, though, wouldn’t the new Windows Phone 7 phones be cheaper than they are?

From what I have read these new phones are all around $200, which is the going rate for high-end smart phones these days on two-year contracts. So they are being subsidized, certainly by the carriers and perhaps by Microsoft, but the companies are just matching the competition: they aren’t trying to buy market share with lower prices.

I think that’s a mistake. I think lower handset prices right now are exactly what Windows Phone 7 needs to have a chance of building market share. Maybe that’s what Microsoft intended but the carriers are keeping the prices up by taking the Microsoft subsidies for themselves.  If that’s so then the carriers are betting on Windows Phone 7′s eventual failure.

Maybe Microsoft had to give the carriers those subsidies in order to get enthusiastic adoption of yet another smart phone platform. This could all be more or less out of Microsoft’s control, much like getting Matt Lauer to correctly pronounce Steve Ballmer’s name on the TODAY Show.

How can you mispronounce a name like “Ballmer?” Lauer can, but I can’t even phonetically replicate his effort here, it was so strange (and he did it twice).

Microsoft is in trouble right out of the gate because the rule of thumb is you need two or more clearly superior points of differentiation in order to gain share from an underdog position in a technology market. I don’t think Microsoft has two.

Microsoft is counting on the innate newness of Windows Phone 7, on its clever streamlined interface, on what Redmond believes — really believes (I know these guys and they love their product) — to be superior performance. That’s plenty of points of differentiation only some of them aren’t real.

Microsoft isn’t Apple. Even Microsoft knows that. So the value of “new” isn’t very much in this case. It didn’t work for the Kin, did it? It didn’t work for Bob, either. New never works if it doesn’t also mean “better,” and this doesn’t — at least not yet.

While Windows Phone 7 may or may not be technically superior, it isn’t so much superior that I can make a judgement that will stick. These phones aren’t out yet, nobody has really used them, and they haven’t been proven on a network (remember Antennagate at Apple?). So Windows Phone 7 may be dramatically superior but who would know? Is the sizzle alone enough to keep us from buying or renewing an iPhone or Android phone while waiting for the Windows Phone 7 handsets to ship? I doubt it.

Then there’s the App Store, or sparseness of it. iPhone and Android have between them about 250,000 more native applications available than does Windows Phone 7. Ironically Microsoft is the underdog here, fighting uphill againsst its own favorite strategy of market dominance. I don’t doubt their heart or determination to do so, but this is new territory for Redmond and I’m not sure they can make it.

So if I was Microsoft and had $400 million marketing dollars to throw at this new platform, I’d make every phone cost $99 or less. I’d bull my way into the market through sheer financial muscle, sending signals all the way down to my Mom in Arkansas that there’s a new sheriff in town.

Only Microsoft didn’t do that.

Maybe they couldn’t force such pricing on the carriers. More likely they are holding price cuts in reserve to be used only if needed — if the market doesn’t otherwise respond to what Microsoft sees as its clear advantages.

I can tell you right now that’s a mistake. If the goal is to get consumers to wait before buying a phone there will have to be some economic component of that motivation in the form of dramatically lower prices.

Having not started with lower prices from the very first minute, Microsoft may well have already lost the battle, no matter how good the phones actually are.

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Dag nabbit I had hoped to get away without having to write a predictions column this year, but no such luck. Look for that one tomorrow. Tonight, of course, there’s Google’s Nexus One smart phone to write about. Is it an iPhone killer? Hardly. And that’s not even the point.

Google’s Nexus One is a very nice smart phone as far as I can tell. I only read what you read and I haven’t yet played with one, but a couple nice folks who were on TWiT with me this week have tried it and liked it a lot, especially the screen. Yet many of the stories I’ve read today have presented this product introduction as a seminal break between Apple and Google with one trying to kill the other. Not even close.

Apple is very happy with its iPhone sales, thanks, and those are unlikely to be hurt much, if at all, by the Nexus One. Not that the Nexus One can’t be a huge success for Google. But here are the points everyone seems to be missing: 1) there is plenty of room in the mobile market for both Apple and Google, and; 2) this product introduction really marks the ultimate decline and fall of so-called “feature phones” and the rise to dominance of smart phones. Within two years there will be no more feature phones, at least not in the U.S.

The real losers today, then, are makers of feature phones and, maybe, Microsoft, which has the most vulnerable smart phone platform in Windows Phone.

The Nexus One introduction, coming on top of the iPhone, marks the true ascendence of smart phones as an alternative platform to desktops and notebooks. No, you can’t survive on a smart phone alone, the days of one computing device per person ended long ago.

But this does mark the beginning of the smart phone shakeout, when the industry matures and inevitably drops to no more than three viably competitive smart phone platforms. So just as you have Windows, Mac, and some form of ‘nix fighting it out for desktops and notebooks, so too we’ll shortly have three major mobile platforms to choose from.

iPhone and Android will be here for the long haul with the question being which of Symbian, Palm, Windows Mobile, or Blackberry will die?

What’s your guess? My guess is that Blackberry will be the third standard, Nokia will eventually leave Symbian for Android, and Microsoft will buy Palm but then screw it up, losing its position almost entirely in the mobile client space where smart phones will soon dominate, selling up to a billion units per year.

Hey this did turn out to be a predictions column after all!

More predictions tomorrow.