With the recent uptick in Lumia sales last quarter, Microsoft had to acknowledge that Nokia had become extremely relevant to the future of Windows on the phone and they had to take action.  In fact, if they waited much longer, other smartphone vendors looking to grow their market share might have stepped up to take over.

With a still-minority share in several markets (10% in 9 markets reportedly), Nokia was already ahead of Blackberry in 34 markets – a testament to the depth and reach of Nokia’s channel-marketing and highlighting again how poorly Blackberry has executed in the past three years from a position of market leadership.

Windows phone relevance has increased over the past year.  In fact, more developers than ever are interested in the platform, especially over their diminished interest in developing Blackberry apps.  The innovative, tile-based operating system is much better received on a smartphone or tablet than on the desktop where critics have lambasted it for failing to retain major intuitive UI aspects of the previous version – like the infamous Start button that is only now being restored.

Windows phone apps are going to get better.  Many apps have not yet made full use of the live tiles capability that enables at-a-glance updates to the home screen.  This feature is much appreciated by users who currently have to “dig” into Apps on iPhone and Android.

Microsoft has licensed over 8,500 design patents and 30,000 utility patents from Nokia in this deal.  This is a prudent step; current analysis shows that royalties are about 10% of the cost of building a Smartphone.  Squeezing cost out of the construction and making large volume orders of materials has been a hallmark of Apple’s strategy in this space.

Interestingly, this is a good financial deal that improves Microsoft’s share of gross margin per unit and utilizes offshore cash for the purchase.  The numbers show that if Microsoft can double the number of units shipped, they will be in a great position to improve the unit’s operating income.

So where does this leave Nokia? In addition to retaining Nokia Siemens Networks, Nokia has licensed its IP and will continue to provide geo-spatial and mapping technologies and services to Microsoft, including the HERE service.  Look for Nokia to go shopping for these types of companies with its cash hoard.

When Stephen Elop set out to guide Nokia almost three years ago, he clearly described his ambition to become the #3 device provider and was resolute in achieving that goal.  Today, we can safely say that he succeeded in that first step.  He is now back in the Microsoft fold, and acknowledged as a candidate for the Microsoft CEO position.  He surely must be a favorite to use the power of Microsoft to move into the #2 device provider position.

Disclaimer: I went to University with Stephen Elop, and he was equally entrepreneurial and determined back then.