Windows Phone 8, coming in the fall, won't run on existing Windows Phones, Microsoft said during the launch of the smartphone operating system Wednesday.
As a result, analysts expect sales of existing Windows Phone models to get battered in the coming months, creating acute problems for the ailing Nokia, which makes Lumia smartphones running Windows Phone 7.5.
"Because Windows Phone 7 is not truly upgradeable to Windows Phone 8, this could have a negative impact on sales of existing WP7 smartphones, Nokia's Lumia devices in particular," said Malik Saadi, an analyst at Informa Telecoms & Media, on Thursday.
Saadi said wireless carriers and users will hold off purchasing smartphones running the Windows Phones OS until the new devices that run WP8 are on the market in the fall. "This will have a serious impact on Nokia's financial performance this quarter as the company relies strongly on Windows Phones as the main platform for its smartphones."
Nokia could not be reached for comment. A week ago, Nokia said it was laying off 10,000 workers amid poor sales of low-cost phones and its Symbian-based phones, while the share of its new Windows Phone sales was still small.
Some features of Windows Phone 8 will be part of upgrades to Windows Phone 7.0 and 7.5 devices, including the Lumia 900 and Lumia 800, with an interim version called Windows Phone 7.8. But WP 7.8 will only "mimic Windows Phone 8 but will lack performance and functionality that will require a deep integration with the hardware," Saadi said in an email.
Part of the reason for the lack of integration is that today's Windows Phones run single-core processors. Microsoft is promising that WP8 will run on smartphones with multicore processors and high-definition screens that support more sophisticated video and gaming applications.
Aside from concerns over phone sales, Saadi said he considers WP8 a marked improvement over WP7, and a possible "game-changer" for the platform that could bring back key manufacturers like HTC, Samsung and LG. Microsoft on Wednesday said that Nokia, Samsung, HTC and Huawei are working on Windows Phone 8 smartphones.
For the most part, analysts say Windows Phone 8 brings the OS into parity with Android and iOS smartphones. WP8 will have Near Field Communications technology and a mobile wallet, an updated start screen, support for encryption and the "secure boot" specification, built-in Nokia Navteq map technology and full Internet Explorer 10 browser with new HTML 5 features.
Another new feature -- a removeable micro-SD card -- will allow users to expand storage. Apple doesn't have expandable storage in its iPhone, and the feature would help set the Windows Phone apart, analysts noted.
"Differentiating WP8 from the iPhone by adding SD card capabilities is ... a positive move," said Al Hilwa, an analyst at IDC.
However, Saadi said IT managers might be concerned about losing corporate data when a micro-SD card is removed from a WP8 phone and obtained by someone not authorized to have the data. "An external SD card makes operators and IT managers quite nervous," he said. It isn't clear whether WP8's encryption capabilities could be applied to the SD card data.
Windows Phone only has 3% of the global smartphone market and faces an uphill climb against Android and iOS, but Hilwa called the WP8 features "mostly good news" partly because of the multicore capabilities coming from WP8's sharing of the Windows 8 kernel.
Jack Gold, an analyst at J. Gold Associates, said WP8's compatibility across desktops, tablets and phones and the apps associated with them is the OS's biggest advantage.
However Gold warned, "WP8 success is not guaranteed. Nokia has not been able to get a compelling device into the market that has taken share from iOS or Android. Lumia is a nice device but has not sold all that well. So it will be a battle for Microsoft and the ecosystem."
Hilwa said the user interface is "evolving in a more positive direction by offering the kind of flexibility suggested by the Metro design." Microsoft said users can add many more live tiles to the start screen than is now possible, but Hilwa said adding more multi-tasking in that way could slow down smooth navigation.
Hilwa owns a Windows Phone and called it a "terrific UI and extremely fluid, and I hope with the more heavy duty multi-tasking possible in WP8, this fluidity is preserved."
Microsoft spent a large portion of its WP8 presentation on its NFC and mobile wallet capability. Saadi said the impact of those features "is very interesting but I doubt this will have any impact on buyers' behavior in Europe or North America."
Google Wallet was launched in beta with a single Nexus S smartphone from Sprint in the U.S. last September, and its impact on mobile buying has been minimal. Google includes what is known as the "secure element" in the hardware of its phones, although Microsoft said it will put that security in a mini-SIM card that can be transferred from phone-to-phone. Orange, a wireless carrier in France, will be the first to offer the SIM card. Microsoft will work with the ISIS consortium of three U.S. carriers on NFC, but will not have phones on that service until 2013.
While NFC and mobile wallet will slowly attract attention, Saadi said mobile app developers will likely be interested in building payment and coupon apps for the platform, especially if they can transfer native code used in such apps for Android and iOS easily to WP8.
Matt Hamblen covers mobile and wireless, smartphones and other handhelds, and wireless networking for Computerworld. Follow Matt on Twitter at @matthamblen or subscribe to Matt's RSS feed. His email address is email@example.com.
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