A report by a Russian blogger with good sources inside Nokia has prompted rumors that Microsoft is looking to buy the Finnish giant‘s phone business.

The blogger, Edlar Murtazin, has a good track record: he predicted the Microsoft-Nokia partnership as long ago as December. Now he says that next week, Nokia will begin talks about the sales of the unit to Microsoft. The deal could close before the end of 2011. “Both companies are in a big hurry,” he writes (in Russian).

Microsoft and Nokia entered an alliance in February that makes Windows Phone 7 Nokia’s primary smartphone platform. That deal also includes crossovers for Microsoft products like Xbox Live, Office and Bing. A few days previously, a leaked memo from Nokia CEO Stephen Elop was made public. The memo referred to Nokia as “standing on a burning platform” amid competition from Google and Apple.

So does the Russian blogger’s rumor have a ring of truth to it? Here’s why it might make business sense for Microsoft to pick up Nokia’s phone business:

• Microsoft has the cash. The company currently has about $32.6 billion in tangible assets. Nokia’s entire market cap is $32 billion.
• It would make sense in light of the Skype acquisition — allowing Microsoft to sell a complete mobile Skype handset solution. Analyst Rob Enderle of the Enderle Group believes a Microsoft/Nokia combo could provide an alternative to standard telecoms, especially around the world. Even in the U.S., where Nokia isn’t as strong, Enderle says there is room for competition to the country’s vanishingly small number of telecom carriers. But offering a Skype mobile solution in the U.S. would probably require Microsoft to buy or work out some kind of deal with an existing carrier.
• It would immediately make Microsoft a major player in mobile manufacturing and distribution. Enderle notes that Nokia’s ecosystem is “second to none in terms of global coverage.”

Here’s why such a deal wouldn’t make sense.

• It would wipe out Nokia. Roger Entner, an analyst with Recon says it would be akin to ending the company. Nokia’s most recent filings peg the share of its Devices & Services unit at 68.2%. The rest of the revenues come from Navteq and Nokia Siemens Networks, meaning Nokia’s entire business would be reduced to digital mapping software and a joint venture with Siemens on telecom services. (Nokia bought Navteq only four years ago).
• Microsoft’s track record with handsets is poor. The company already tried its hand at cellphone manufacturing with the $500 million purchase of Danger in 2008. Danger, which made the then-popular Sidekick phone, failed to reverse Microsoft’s fortunes in the mobile segment.
• It would go against Microsoft’s philosophy. Competing hardware manufacturers would likely have less interest in using the Windows 7 platform. That might turn it into a closed system, like Apple’s. Microsoft has made its fortune using a different model, where it provides software and lets its partners worry about the hardware.

In a situation where Microsoft is failing to get a piece of a growing segment like mobile phones, does it make sense to double down? Entner thinks such a move would be crazy. “Microsoft is a very good software company,” says Entner. “But ultimately, they’re not a phone company.” True enough — but before Xbox, Microsoft wasn’t a gaming console company, either.

What do you think? Would this make sense for either Microsoft or Nokia?

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