Microsoft’s $1B For Nokia: Cool or Calamity?

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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