Federer lost in the final for the second straight year. "When you get an afternoon off, you take it", said the 37-year-old Federer, the oldest finalist in tournament history.
Swiss Federer, a 20-time Grand Slam champion, converted just two of 11 break points and made 32 unforced errors to Thiem's 25.
Before the match against Milos Raonic, Thiem had said: "He's also very hard to play because he's also good from the baseline".
"Definitely some things I would have liked to do better", Raonic said afterward. Then, of course, there are going to be many games where I will have zero chance on his serve. He was beaten in a third-set tiebreaker by Juan Martin del Potro a year ago. "I was really looking forward to the match and I'm sorry it didn't happen".
"My goal is to play on all the surfaces", he said.
It was just the fifth time in Nadal's career that he had conceded a walkover, and the first to Federer. "Now it starts the process that I have to decide what direction we have to take to recover well and to recover as soon as possible".
Crude Oil Weekly Price Forecast - Crude markets break out
Energy prices fell off a cliff in late 2014 but have started to rebound on the back of agreed cuts by OPEC in Vienna previous year .
Given the statistical advantage that Federer enjoys over Thiem on hard court, I do think the prices are about right for tonight's match, and there can not be any pre-match recommendation on this basis.
Thiem earned the crucial break in the 11th game of the final set, connecting on two sharply angled passing winners to give himself a break point which he converted with a stinging forehand victor.
"I warmed up today and I felt that my knee was not good to compete at the level I needed", he said. For Thiem, this marks a career high, not only being his first Masters 1000 after two failed bids, but also propelling him to world number four.
Federer raced to an early lead, winning the first three games before wrapping up the first set in the Southern California desert.
Federer won the last time they played at the ATP Finals in London in November. "Now to have my name in front of so many champions it means the world to me".
Having been forced to retire midway through a match nine times before, including in last year's US Open, Nadal didn't want to go through the same situation again. "It's only my third one".