This article by Christopher Brown-Humes from the Financial Times looks at the position of Nokia in the forthcoming years and says the real competition is not from Motorola but Microsoft.

Nokia's market leadership in the mobile handset market masks what the Finnish company's senior executives view as their main competitive threat.

Forget second-ranked Motorola: it is Microsoft which worries them.

Microsoft's presence in Nokia minds reflects the changing nature of the telecommunications business as the computer and wireless worlds converge. It is moving from voice to data, and from hardware to software.

For Nokia, the potential changes to the competitive landscape revolve around margins. Nokia will find it impossible to maintain handset margins above 20 per cent if Microsoft succeeds in making its operating system the de-facto industry standard.

If the US company can achieve the same impact in mobile telephony as it has done in PCs, the mobile phone industry could follow the PC sector and find huge parts of the business being turned into commodity products.

"Nokia might still be the world's leading maker of handsets in 10 years' time, just as IBM is the world's leading maker of computers today. But if Nokia's margins fall to IBM levels there will have been a dramatic change," says one analyst.

Microsoft is not the only threat to Nokia's pre-eminence as it prepares to report second-quarter results tomorrow. It has suddenly found itself in a low-growth business where the much-vaunted profits from third- generation services look far from assured.

Competition is increasing. Rival handset equipment makers - notably Samsung, Siemens and Motorola - are gaining market share while personal digital assistants are increasingly being equipped with antennae.

Motorola, Ericsson and Qualcomm are also licensing out key aspects of their technology, which makes it easier for other manufacturers to enter the mobile phone business. This could also hasten the commoditisation of the industry.

Nokia appears well-equipped to fight its corner. Its 36 per cent global market share of the handset business gives it unrivalled economies of scale in everything from purchasing to research and development spend.

Its strengths in design, execution, and logistics are also undisputed, and it has an extremely strong balance sheet and brand.

Nokia is certainly not going to surrender its position or profitability easily. The clearest indication that it is worried by the Microsoft challenge has come with its decision to license its Series 60 advanced phone software to other companies.

The two takers so far are Siemens and Matsushita. Series 60 sits on top of software developed by Symbian, an operating system supported by most of the world's biggest handset makers. Microsoft's rival offering is the Microsoft Smart Phone, or Stinger.

The Series 60 initiative carries a danger for Nokia because if it helps Siemens to sell more phones, Nokia itself may sell fewer. But the Finnish company is gambling the move will expand the overall size of the market and that its software, rather than Microsoft's, will become the standard.

What moves is Microsoft making into the wireless world? It is working with low-price manufacturers, mainly in Asia, and with telecoms operators.

So far it has not had any success in collaborating with the big handset manufacturers, the exception being Samsung of South Korea which seems prepared to offer operators whatever software they want, including Symbian.

Robbie Ray Wright, director of the mobile devices group for Microsoft in Europe, says Nokia and Microsoft both have the same interest in driving the development of smart-phones and the services that will make data a success.

"We at Microsoft want to marry the PC and wireless world. We don't want developers to have to write applications twice - both for the PC and the phone," he says.

Microsoft has mainly been concentrating on the personal assistant market. A handset with a Microsoft operating system is being made by Sendo, a UK manufacturer, but its launch has been delayed.

"The acid test for Microsoft will come next year. That's when we will see if there is a market for handsets with pre-installed Microsoft operating systems," says Thomas Langer, analyst with West LB Panmure in Dýsseldorf.

Network operators could play a key role in determining how the industry develops - and they appear to want to work with Microsoft.

"Nokia has become so dominant. The networks are keen to buy from anyone else. They don't like Nokia dictating terms," says Simon Rockman, publisher of What Mobile in the UK.

But Nokia is nothing if not resilient. During a downturn that has ravaged telecoms equipment makers and operators alike in the past two years, it has maintained its margins and even increased its market share. Lower sales have been offset by a squeeze on costs and suppliers.

The company certainly does not believe that its margins are about to fall off a cliff, insisting that barriers to entry are not tumbling.

Jorma Ollila, Nokia chief executive, told analysts last month: "I simply don't see any way that this industry is going to go the path of the PC." The handsets business is far more complex, and its volumes - 400m phones are sold each year compared with 120m PCs - and structure are entirely different, he argues.

However, a battle between Microsoft and Nokia in the wireless market is looming. It could be there is enough room for both to have a big presence, and that handsets, PDAs, and laptops all find their place in the new landscape. Nokia could even end up collaborating with Microsoft. For the moment, though, the two companies are on a collision course.