But how would they differentiate from Samsung? Replacing stock Android UI with a custom skin, a practice that everybody seems to hate? Installing specific apps, which too, are often derided? The one Nokia app that is significant is Drive, but they could not leverage that because Google does not allow their own location-based apps to be replaced on their "open" platform. (See Skyhook lawsuit.) Their investment in Navteq would be a complete write-off.

That leaves the hardware arena, where, by my reading between the lines, Nokia felt it would not be able to compete effectively enough given Samsung's "vertical integration", not to mention, their "resources" (read: marketing budget).

They can differentiate in the actual meat of the mobile handset business, as they once did.

1) Branding

2) Hardware reliability

3) Customer service

4) Ownership events

5) Carrier logistics and partnerships

EDIT: 6) Industry 'firsts', such as SMS and MMS that were pioneered by Nokia. These days it's Samsung, Google and Apple coming up with new features while others struggle to catch up.

The 'OS customization' is just the potatoes of the business. Most people are just as happy - or happier - without any customization or differentiation on the software level. Windows Phone isn't exclusive to Nokia either, so the sheer stupidity of Nokia's strategy should be plainly obvious.

But of course! All the other Android manufacturers must be absolutely blind not to try all these things as well! That must be the reason they are all struggling so much and Samsung is stomping all over their profits!

Or maybe... Could it be that Android has commoditized the handset business, just as Windows did the PC hardware business, so maybe all those things don't help as much any more?

In response to your edit: It's not really Samsung bringing new things to the table, it's Google and maybe to some extent Apple. The big innovations aren't in the hardware or even the software, it's in the services, such as Siri and Now. Sure every Android vendor and their grandmother have their own cloud services, but the ones everybody wants are Google's. Unfortunately, since it's not limited to a specific Android manufacturer, it wouldn't help Nokia either.

Sure, at a higher level they compete with Samsung in this large "OS pond". There are levels of granularity that you're discounting, though. There's a non-trivial portion of the market that is determined to buy a Windows phone (ie. they enjoy the entire Windows experience as someone buying completely into the Apple experience would). Nokia wants to be top of mind, top of market for these individuals. Until there's data showing that there is indeed a heavy rate of attrition from potential Windows buyers to actual Android/iOS purchasers, it's fair to say that Nokia made a good play, especially since their own OS wasn't going anywhere. Also, Windows 8 and the Surface Tablet only came out last year. Obviously we'll see in the earnings reports how Nokia is faring with these new devices/software, but I'll bet that Nokia is going to be in a better position than it would be if it still had Symbian or Android (would've probably been overshadowed by GS III / IV and HTC One).

> There's a non-trivial portion of the market that is determined to buy a Windows phone

Is there any evidence of that? From what I could Google, Windows Phone market share is still under 5% and only recently surpassed Blackberry: http://www.idc.com/getdoc.jsp?containerId=prUS24108913

I think that's a good demonstration that number of people determined to buy Windows Phone in the market is, in fact, entirely trivial.