Nokia’s Elop: We can do things with Windows Phone that Microsoft can’t

A year and a half ago, Nokia(s nok) CEO Stephen Elop wrote a passionate memo to his employees, warning them that Nokia was perched dangerously atop a “burning platform” that the company had to flee in order to survive. Three product generations later, Elop may be about to realize that the company that tossed Nokia a lifeboat — Microsoft(s msft) — may be dousing that lifeboat with gasoline.

Nokia’s Lumia smartphones have been critically acclaimed as one of the first true answers to the iPhone(s aapl) that were based around a unique experience, rather than a homage (or copycat, depending on your perspective) to the iPhone experience that kicked off the mobile computing renaissance. However, they have done nothing to change either Nokia or Microsoft’s mobile market position, as the modern smartphone market remains a two-horse race in the U.S. according to Comscore’s latest data.

Nokia Lumia 920 smartphones

And after Microsoft shocked the PC industry earlier this year with plans to build its own tablet based around Windows 8, persistent rumors have circulated that Microsoft also plans to build its own smartphone, which would throw the “special relationship” between Microsoft and Nokia into a new place. In an interview with GigaOM Tuesday, Elop declined to comment directly on whether Microsoft has plans to undercut his business. However, he did point out that because of the strong bet that Nokia placed in Windows Phone when no other phone maker would make more than a tepid commitment, Nokia won certain “exclusivities” that no other Windows Phone maker — not even Microsoft — has the right to duplicate.

A transcript of my interview with Elop (edited for length, clarity, and to remove all of our “ums”) follows below.

When did you learn that Microsoft was doing the Surface tablet?

I think everybody in the industry, PC manufacturers, OEMs, partners, we all heard in the days before the Surface tablet was released. We were no different than anybody else, it was in the days leading up to that announcement.

What was your reaction?

Well, I have some history with Microsoft as you know

Just a tad.

I think I understand it, in that Microsoft wants to have the best combined experiences — hardware, software and services — to showcase what Windows is capable of. I think there is a point of view, that either through using stores of their own, creating specific hardware to highlight things, (that) they have to take steps to set a certain bar in terms of what they expect the Windows experience to be. And so to the extent that there’s quite a bit of history on the PC side of things, where they understand pretty well what the OEMs will do, and the nature of the hardware, how that compares with competitors that like sitting on your lap (points at my MacBook Air), (they) need to make sure the bar is pretty well set.

On the phone side of things, we’re particularly proud of the fact that with the devices we’re introducing, like the Lumia 900 at CES a year ago, we’re winning awards like best of show, saying this is the best that’s being done. On the phone side, there’s a bit of a different pattern there, particularly given the close relationship with Microsoft and Nokia.

Well there has been several reports today that suggest Microsoft is in fact building their own branded phone. They’ve clearly signaled an interest in doing their own hardware with Surface, and over the past months since that introduction, have been very coy about the prospect of a phone. How would that change the relationship?

The way I think about that, I don’t think it changes the relationship. It’s incumbent upon us at all points in time to build the world’s most innovative smartphones. Which is what we believe we’ve done, for example, with the Lumia 920. That’s something that’s done based on years and years of work, and years of investment in what makes great mobile devices.

Nokia Lumia 920 PureView camera demo

A sample photo from the PureView camera on Nokia’s Lumia 920.

For example, the reason the Lumia 920 is standing out so well amongst the competition, one of the reasons is the imaging capability, this low-light photography capability. That’s five or six years of work in our labs, engineers doing nothing else but working on that technology. Saying, “oh, this year, we’re going to do our own phone,” doesn’t allow you to do that. You have to make those investments over a period of time.

You are putting many of your eggs in the Microsoft basket. How do you carve out that space for Nokia, to make sure you don’t lose control of the fact that at the end of the day, you have to move phones. Microsoft is licensing bits, but you have to move product.

The way we do that is that we have defined contractually and in practice, a way we operate to make sure that jointly we’re setting priorities for what needs to be done, to make sure there are certain capabilities or even exclusivities that are included for Nokia products for things that are most important to us. Clearly, photography and optics are an example of things that are important to us.

They have to create an environment in which our work can be done; they have to give us the hooks. But then, the actual magic that makes optical image stabilization work, which is hardware and software, is done by Nokia engineers.

But they aren’t necessarily creating custom parts of Windows Phone that are exclusive to you.

They could.

That’s not what I asked. Are they doing it?

What they’ve done in the camera case is given hooks, capabilities that others could take advantage of, to plug things in. Of course, you need something to plug in, and we happen to have made the investment over the years in this PureView technology that can be plugged in. From our perspective, this is an important point about what we’ve done at Nokia, the percentage of our R&D that’s focused on productive R&D–not plumbing–has gone up substantially.

What Microsoft has done with Windows Phone is create a square in which you guys can do certain things, Samsung, can do certain things, HTC can do certain things. And then the things that you do within that square are things that are unique to you. But, there isn’t necessarily a Nokia build of Windows Phone.

We have rights beyond any of the other manufacturers to do unique things and to enforce certain exclusivities for our products. We don’t disclose what those are, or the extent of those. But we have the ability to differentiate.

We earned that right by being the only company who said, “we are placing our primary bet on Windows Phone.” That was a specific negotiated aspect of the relationship.

If the OEM you’re competing with is Microsoft, that makes the world a little more different.

We still preserve the same rights under the contract, regardless of who is making those phones. There are certain things we have rights to.