Nokia ditches plans for X7 smartphone on AT&T

Nokia has canceled the U.S. release of a new smartphone that was supposed to be exclusive to AT&T, CNET has confirmed.

The Wall Street Journal first reported the news today, but a source close to the situation, who didn't want to be named, confirmed Nokia had pulled the plug on the launch of the new smartphone on AT&T's network.

The X7 smartphone hasn't been officially announced yet, but details of the device have been leaked online.

The X7, which is still expected to launch outside the U.S. on other carriers, is a touch-screen smartphone designed for mobile gaming that is expected to sport the Symbian 3 software. It's expected to sport an 8-megapixel camera with dual-LED flash on the back of the device and come with four external speakers. Nokia was expected to announce the new phone with AT&T next month in conjunction with the Mobile World Congress in Barcelona.

The X7 would have marked the first smartphone that Nokia launched exclusively on a U.S. carrier since the company's new CEO Stephen Elop took over in September. Elop, a veteran of Microsoft, replaced Olli-Pekka Kallasvuo, who had spent 30 years with Nokia.

An AT&T representative declined to comment on the situation. And Nokia issued this statement via a spokesman:

"We do not comment on market rumor and speculation, or ongoing discussions with our operator partners about what plans we may have together in this market. That said, it is well publicized that we are working hard to regain leadership in the U.S. market and we are in active discussions with our operator partners on that strategy. We look forward to bringing meaningful solutions to market together with our operator partners and when we have something to announce, we will do so."

It's not clear why Nokia decided to cancel the U.S. launch of the new smartphone. Nokia has struggled to gain market share in the U.S. market, especially in the fast growing smartphone market. And it has steadily been losing worldwide market share to competitors such as Apple, Research In Motion, and now a slew of competitors selling phones running the Google Android operating system.

Nokia still had about 32.7 percent of the worldwide smartphone market in the third quarter of 2010, according to market research firm IDC, but this is down from 38.3 percent a year ago. Meanwhile, competitors, such as Apple, Samsung and HTC have all gained market share worldwide.

In the U.S., Nokia doesn't even rank in the top five for smartphone makers. For years, the company, which is based in Finland, has talked about the need to break into the U.S. market. One of its biggest problems is finding a U.S. carrier to help subsidize the cost of its devices. Nokia launched the N8 in 2009, but it did not launch the phone with a carrier partner. Instead, consumers can buy the phone at the full retail price of $469. The fact that is has lacked a key carrier partner in the U.S. has hampered sales.

This is why a deal with a U.S. carrier is crucial to Nokia's success. And since Nokia only makes phones for GSM networks, AT&T is the biggest potential partner in the U.S. market. So why would Nokia cancel the sale of the X7 on AT&T?

The Wall Street Journal's source claims that Nokia canceled the launch of the new smartphone because it didn't feel that AT&T would provide enough of a subsidy to consumers buying the device.

U.S. consumers have come to rely on massive carrier subsidies to help defray the cost of owning sophisticated smartphones. Consumers generally expect to pay between $150 and $200 for the latest and greatest smartphones in exchange for signing a two-year contract with the carrier. But the true retail value of these phones is much more than the $200 most people are willing to pay.

For example, AT&T sells the 16GB iPhone 4 for $199 with a two-year contract. And it sells the phone for $599 without the contract. That's a subsidy of $400 per device.

But CNET's source implied that there could be another reason Nokia doesn't want to launch this particular phone in the U.S.--a lack of confidence in its operating system. The company has already announced plans to move toward the MeeGo operating system on future smartphones.

The Symbian 3 software is an update to an operating system that has been a part of Nokia's cell phone family for years. Unlike its competitors, Nokia has resisted embracing other mobile operating systems, such as the fast growing Android.

Instead, the company announced last summer a strategy to use a completely different operating system called MeeGo for advanced smartphones and other devices. MeeGo was born in 2010 from the combination of two other Linux efforts: Nokia's Maemo effort and Intel's Moblin. The MeeGo OS is expected to power a range of devices, including pocketable mobile computers, Netbooks, tablets, connected TVs, and in-vehicle infotainment systems.

But development of the software has been delayed. Initially, Nokia hinted that the software would be available in 2010. But in October, Elop suggested on an earnings call that MeeGo wouldn't be available until 2011.

While Nokia has said it will also keep developing for and including Symbian on certain devices, the operating system does appear to be fading from importance. Even other companies using the Symbian OS seem to phasing it out of new products in lieu of Android.

Sony Ericsson is the only major cell phone maker using Symbian other than Nokia. And like its cell phone competitors, such as Motorola, HTC, LG, and Samsung, Sony Ericsson is starting to use Android on its newest smartphones. In fact, the company's Xperia X10 runs Android, and it's expected the new Sony Ericsson PlayStation phone will also run Android.

What does all this mean for Nokia and its decision to not launch the Symbian-based X7 in the U.S. on AT&T? It's very likely the company is reassessing its U.S. smartphone strategy. Perhaps the company is reevaluating whether it should spend the effort and money to market a product that is using a somewhat outdated platform.

Elop has only been at Nokia's helm a few short months, and he has yet to detail his plans for the U.S. market. The Wall Street Journal suggests Nokia might divulge more of its U.S. smartphone strategy on its upcoming quarterly conference call scheduled for January 27. So stay tuned for more on this story as Nokia makes its plans public.

Updated 4:46 p.m. PT: This story has been updated with confirmation from CNET sources as well as with additional background information information.