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Summary:

Reports suggest Microsoft is paying Nokia $1 billion to drop its own software and adopt Windows Phone 7. That’s big money on the surface, but looking at the pros and cons for each of the two sides, it may look cheap a few years from now.

The Social Network

The Social NetworkSomewhere in the dark heart of David Fincher’s The Social Network, an excited Justin Timberlake-as-Sean-Parker conspires with his protegé, the fake Mark Zuckerberg, with a line that has already gone down in cinematic history: “A million dollars isn’t cool. You know what’s cool? A billion dollars.”

There’s no suggestion that Stephen Elop and Nokia’s board had been screening the Facebook film when they forged their pact with Microsoft last month, but there is something dramatic about Bloomberg’s report that Redmond is paying its Finnish ally around $1 billion to adopt Windows Phone.

There had already been plenty of speculation about the financial side of the deal, but if the report is accurate, the cash will be spread over five years, ostensibly provided as a way of helping Nokia develop and market Windows handsets. It also acts as a handy tool to smooth over any cracks in Microsoft access to Nokia’s library of patents and services.

Like the alliance itself, there has been mixed reaction. The market seems fairly muted, with Nokia up 1 percent on the Helsinki exchange and up around half a percent in early trading on Wall Street.

Whatever you think of the deal, though, it shouldn’t really be a surprise that there was some financial agreement between the two companies. There was speculation about it straight away, even if Stephen Elop and Steve Ballmer were both cagey about money at their joint announcement last month. It’s unimaginable that any deal of this sort wouldn’t include some form of encouragement — so the question is, perhaps, less about the size of the payout and more about what it means.

There are at least a couple of ways to look at this.

It might suggest that Microsoft has managed to spend just a billion dollars to buy access to the technology and distribution platform of a frenemy — the backdoor takeover that so many Nokians are concerned about. It has precedent: Steve Ballmer’s aggressive but failed attempt to buy Yahoo ended in a deal that cost Microsoft far less and, arguably, got it precisely what it wanted in the first place. And if it ends up that Microsoft does gain more of an interest in Nokia’s business, that would be a coup. After all, the world’s largest handset manufacturer has a market capitalization of some $30 billion.

Business Insider points out that at $15 for a Windows Phone license, Microsoft will make that cash back if Nokia shifts 60 million WP7 smartphones (it sold 31 million using its ailing Symbian software in the fourth quarter of 2010 alone). If Microsoft can grab some of that market share for Windows Phone by using Nokia’s global reach and scale — and drag along some of the developer talent it’s already paying – then a billion dollars is nothing. It’ll certainly take the heat off Ballmer, and give the company a true shot at challenging Research In Motion and Hewlett-Packard  for the third mobile platform behind Apple and Google.

From Nokia’s perspective, this doesn’t look like a great deal. Two hundred million dollars each year for five years is a fairly paltry sum when you look at what the company is cutting back: thousands of jobs and somewhere in the region of $2 billion in R&D spending that currently goes on Symbian and MeeGo. It’s hard to see a billion dollars being anywhere near enough to change anyone’s mind.

On the other hand, perhaps this was the best deal on the table. Nokia’s other options were, after all, pretty limited: stick with its own struggling systems or forge an alliance with Google and adopt Android — and that’s something Stephen Elop has made pretty clear wouldn’t have resulted in a special relationship between the two companies, even if Larry Page and friends handed over cash. In this view, the cash from Microsoft is a sweetener that just made the decision a tiny bit easier.

And the money, wherever it goes, potentially has another upside: It gives Nokia a chance to learn from its mistakes. How do you build a quality, high-end, mobile operating system? How do you write great software? These are things that could help Nokia, if it can let Windows Phone 7 do the work for now until it understands and corrects its own failings. There’s a slim possibility that this could let it rework MeeGo into a viable platform over the next few years — until, somewhere down the road it may have rebuilt itself into a serious, independent contender again.

So in the end, the issue is straightforward: The money laid out doesn’t matter to either company if it achieves its intended goal of getting the two companies a seat at the smartphone table alongside Apple and Google. If that plan works, then you can imagine a large number of people in Redmond and Espoo thinking that a billion dollars is very cool indeed.

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  1. For 10 years Symbian has been a better selling software than Windows Mobile. Does that make Microsoft a better software maker ?

    And windows phone is still not selling properly for people to find its shortcomings and mistakes. its beauty is still skin deep.

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    1. Nor, does it make Symbian any better! We tolerated plenty of operating systems in the past, and mobile is in its infancy to say the least.

      How Symbian or RIM for that matter can survive in the face of rational, mobile software development tools is beyond me. I refused to even enter the mobile space until Apple launched the necessary tools and processes.

      The past is a waste of time.

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  2. worst deal ever. Nokia had the chance to be the Android King outside the US and lost it. Paying $0 per license, and re-using a lot of what they had built for Meego, since Android is Linux.

    They got screwed the minute they let in a Microsoft CEO in, he sold out the company to redmond for a $1bn loan. Sad. Nokia probably deserves to crash and burn for being so stupid.

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    1. Johnny Tremaine Tuesday, March 8, 2011

      I agree that Nokia is pretty much doomed now. Their one trump card was riding on all that Symbian market share.

      With Windows Phone, that all goes ‘poof’.

      Plus, the big gamble is relying on Microsoft to stay competitive with a frequently updated OS, adding in the tons of missing features. Considering their recent upgrade follies for even the first WP7 update, Nokia should be extremely concerned right about now.

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  3. I honestly love my new Windows Phone, and the seamless integration with the free Office Live (Excel, PPT, OneNote, Word) is fabulous. I don’t know why more people don’t know about these capabilities, but it’s clearly a marketing problem. The phone itself is rock solid, not a single lockup, and it is very fast too. I’m very impressed, and my old iPhone is in a drawer.

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  4. There is an unspoken elephant in the room, that wasn’t mentioned in this article.

    Windows Phone 7 is a flop.

    That part is irrefutable and beyond question. We know as a fact that Microsoft’s total share of mobile is still plummeting downwards (see ComScore stats). Something is very very wrong with Windows Phone 7.

    Windows Phone 7 is a failed mobile OS. How can anyone possibly say otherwise? Ballmer once boasted WP7 would sell 30 million units in its first year. AT&T once said it ordered 8 million units for its network alone. The reality is that Windows Phone 7 is having difficulty scraping past 1 million consumer sales (worldwide) in its first 4 months, and sales are falling.

    What does Nokia think it can do with Windows Phone 7 that Samsung, HTC and LG could not do?

    For starters, Microsoft’s reputation in mobile is poison. Previous failed mobile platforms, such as Windows Mobile, Sidekick, and Kin, have entrenched this image in the public mind. The public does not want to use a Microsoft mobile OS.

    Nokia’s old candybar phones appealed to the public because they had user-friendly intuitive menus. But this means nothing in the smartphone era. People are loyal to a platform (eg iOS or Android) rather than a hardware OEM, be it Nokia, Samsung or LG.

    Nokia has its distribution channel, but this is not going to save Windows Phone 7. We have multiple WP7 models on the market now, from various OEMs, and they are all selling poorly. Increasing the number of models will do nothing to boost Windows Phone 7, which the public has already rejected.

    The Nokia-Microsoft deal can only be described as bizarre, in the absence of a logical reason for it. Microsoft’s 1 billion is insignificant, and does not provide that reason.

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    1. Definitely a comment full of great, valid points, Dave, but I don’t think you can say Windows Phone 7 sales are falling based on the ComScore numbers. Here’s why: ComScore lumps Windows Mobile and Windows Phone 7 sales together. It’s a reasonable assumption that Windows Mobile sales are indeed dropping: there haven’t been any new devices in a while and other platforms are getting the shelf space / advertising dollars. And if Windows Mobile sales are dropping faster or more than Windows Phone 7 sales are rising (very likely), the overall number would show a decline. We simply can’t draw the conclusion that Windows Phone 7 sales are falling as a result.

      Having said that, I agree that Microsoft and Nokia still have a long road ahead of them; even when working together.

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  5. $1 billion will pay for:
    comfy European-style severance for 10,000 cut Nokia staffers

    $1 billion is less than the *current* US mobile search ad market and Bing will go on all those Nokia Windows Phones.

    http://bit.ly/gnTdTE

    Ballmer got his money’s worth, no doubt.

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  6. “There’s a slim possibility that this could let it rework MeeGo into a viable platform over the next few years”

    Nokia will still be investing around $200m/y on Meego directly, and closer to $400m on the broader Meego project including hardware, services and QT, so they do still have that option.

    http://jedibeeftrix.wordpress.com/2011/02/12/nokia-microsoft-and-what-it-means-for-qt-and-meego/

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