Ian Fogg, analyst and director, Mobile and Telecoms at market research firm IHS, discusses the pros and cons of Microsoft’s plan to acquire Nokia’s mobile devices and services business, and licence Nokia’s patents.

This is a high risk but high potential rewarding strategy for Microsoft. Outgoing Microsoft CEO Steve Ballmer is locking in Microsoft and his successor to the “devices and services” strategy he announced last year by buying one of Microsoft’s key hardware partners.

Also, it is the end of the beginning for Nokia’s Windows phone strategy which its unveiled in 2011. However, there are enormous challenges ahead. All of the problems facing Windows phone continue to exist and Microsoft must re-double its efforts to speed up mobile innovation with the new vertical structure. But competition in the mobile space is fierce.

The new company has a long road ahead to establish Windows phone as a viable competitor to Android-based handsets and Apple’s iPhone. In Q2, 2013, Nokia shipped just 7.4m Windows phones compared with 31.2m iPhones and 185m Android smartphones. IHS forecasts that unless Microsoft speeds up Windows phone innovation, by 2017 Windows phones will comprise just 5% of overall smartphone shipments globally.

So what does Microsoft need to succeed? To succeed with Windows phone and change this forecast, Microsoft must increase both the quality and quantity of third party Windows phone apps. It must spend tremendously on marketing and channel incentives to drive Windows phone awareness with consumers and ensure the phones are widely ranged by mobile operators.

Microsoft must also increase the pace of Windows phone feature innovation, end the disjointed experience of multiple maps and camera apps on Lumia smartphones, improve multitasking and add key enterprise features such as VPN support which is frankly astounding that this is still omitted. Microsoft must also accelerate Windows phone support for new hardware: as of this announcement there are still no Windows phones shipping with 1080P high definition (HD) screens or quad core processors. Android handset makers on the other hand, have been shipping such quad core models for over a year and 1080P screen devices since early 2013.

Microsoft is right to buy Nokia’s non-smartphone business alongside Lumia smartphones because this provides a route to up-sell prospective feature phone owners with Windows phones. As all mobile phones become smart, Microsoft will be well-placed to drive the transition.

The deal provides a neat escape route for Nokia from its struggling handset business. In February 2011, then Nokia CEO Stephen Elop made the courageous decision to switch Nokia’s smartphone strategy to using Windows phone. In the process, Elop killed Nokia’s Symbian and MeeGo smartphone operating systems. Since then, Nokia smartphone shipments have collapsed from 24.2m in Q1, 2011, to 6.1m in the same quarter in Q1 2013.

With hindsight, Elop’s decision to use the Windows platform was the wrong decision for Nokia because the company has struggled to establish Windows phone volumes. And, while Nokia expected it would be impossible to differentiate handset designs using Android, its handset maker rivals have successfully built sophisticated user interfaces and custom apps on top of Android that makes a Samsung smartphone feel very different to one from HTC or Sony.

But in 2013 it would be much harder for Nokia to switch to Android. Its former subsidiary Vertu has launched an Android smartphone. But for Nokia to switch to Android would have required large investments, patient shareholders, a new management team, and Nokia would have had to accept being a smaller part of the smartphone market. Selling to Microsoft is a more natural continuation of recent Nokia strategy rather than a u-turn in direction.

Unless Microsoft can speed up the pace of innovation with Windows phone software, user experience and third party app quality, I don’t expect any changes increase in its overall Windows phone forecast.