The rumor has been confirmed: Nokia was working on an Android smartphone at the time that Microsoft decided to buy Nokia's phone business. That's likely one of the key reasons that Microsoft decided to take the plunge and make the deal.
... it is clear that a Nokia Android phone was more than a possibility. It was real.A team within Nokia had Android up and running on the company’s Lumia handsets well before Microsoft and Nokia began negotiating Microsoft’s $7.2 billion acquisition of Nokia’s mobile phone and services business, according to two people briefed on the effort who declined to be identified because the project was confidential. Microsoft executives were aware of the existence of the project, these people said.
Microsoft's initial deal with Nokia about Windows Phone ran only until the end of 2014. If Nokia were to have switched from Windows Phone to Android after then, Windows Phone would be dead in the water. Essentially, Nokia is Microsoft's lifeline to the smartphone business. The latest AdDuplex research reveals that Nokia has 87% of Windows Phone 8 market share worldwide, with HTC at 10%, Samsung at 2%, and Huawei at 1%. Nokia has nine of the top ten Windows Phone devices worldwide.
The Times report confirms what Ben Thompson of Stratechary wrote write after the deal went through:
"I theorize that Nokia was either going to switch to Android or was on the verge of going bankrupt...And, had Nokia abandoned Windows Phone, then Windows Phone would be dead.Windows Phone has already been largely abandoned by other OEMs; Samsung and HTC make warmed-over versions of 6-month old Android hardware, and that's really about it. Of course that will now stop, Microsoft’s protestations to the contrary, but regardless, without Nokia it would be over.
One might argue that Nokia had made no solid plans to jump from Windows Phone to Android after 2014, and so that had no bearing on the Microsoft buyout. But no solid plans were needed. Just the possibility that it might happen likely spurred Microsoft to make the deal. Call it blackmail or call it smart business, Nokia knew what it was doing when it launched its Android project. The goal was probably not to make the switch to Android as much as it was to get Microsoft to buy a big chunk of the company -- and it worked.