Microsoft's $1 Billion Nokia Deal Good for Global, Maybe Not in U.S.

Microsoft is reportedly paying Nokia more than $1 billion to port Windows Phone 7 on its hardware. Data suggests the effect on the U.S. market could be negligible.

What does a billion dollars buy you?

If you're Microsoft, it apparently buys you a new manufacturing partner. According to a March 7 Bloomberg report, itself quoting two unnamed sources "with knowledge of the terms," the company plans on paying Nokia more than $1 billion over five years to manufacture handsets running Windows Phone 7.

In return, Nokia apparently plans on paying Microsoft a license fee for every copy of Windows Phone 7 installed on a smartphone. A final contract remains to be signed, however, and some additional payment-structure details may emerge in the meantime.

The partnership between the two tech behemoths will almost certainly alter the mobile landscape in coming years. However, some analysts have expressed reservations over the combined companies' ability to execute in a way that will actually reap benefits.

"If Nokia wanted to leave mobile-operating-system development to another company, IHS thinks Google Inc. and its Android software would have been a better choice," William Kidd, an analyst with IHS iSuppli, wrote in a Feb. 14 research note. "Nokia could have reaped many of the benefits it expects with the Microsoft relationship from either Google or Microsoft. But clearly, the unspecified billions in Microsoft cash payments were an important motivating factor in entering into the deal."

In addition, it could be several quarters before Nokia phones running Windows Phone 7 actually arrive on store shelves.

"With the Microsoft deal unlikely to yield any products for nearly one year, Nokia will have no choice, except to remain awkwardly reliant on the Symbian and MeeGo platforms in 2011," Kidd wrote. "This will have a further negative impact on the Nokia's already-eroding position in smartphones."

For Microsoft, that billion has earned it increased attention from developers. As speculation of a Nokia deal filtered across the Web, more third-party developers launched projects on the Windows Phone 7 platform.

"Flurry measured a 66 percent increase in Windows Phone 7 starts over last week," Peter Farago, vice president of marketing for analytics firm Flurry, wrote in a Feb. 11 posting on his company's blog. "From Flurry's point of view, this week's spike in Windows Phone 7 developer activity shows that developers not only believe that Nokia has given Microsoft Windows Phone 7 a shot in the arm, but also that Nokia and Microsoft together can build a viable ecosystem."

Even if more developers flock to the platform, at least in the short term, the question remains how much of an impact the Nokia deal will have on Microsoft's overall smartphone market share.

In a new report, research firm comScore suggests that Microsoft's share of the U.S. smartphone platform market dipped 1.7 percentage points between October 2010 and January 2011, from 9.7 percent to 8 percent. That trailed Google, which ended January with 31.2 percent of the market, Research In Motion with 30.4 percent and Apple with 24.7 percent. Microsoft did manage to beat Palm, whose share fell by 0.7 of a percentage point during that three-month period to 3.2 percent.

Anxious to carve out more of a presence in the smartphone market, and replace its increasingly antiquated Windows Mobile franchise with a platform capable of battling toe-to-toe with the likes of Google Android and the iPhone, Microsoft released Windows Phone 7 in Europe in late October 2010, followed by an early November rollout in the United States.

Despite the massive advertising push accompanying that launch, the comScore numbers suggest that Windows Phone 7 is doing nothing, at least in the short term, to halt Microsoft's market share slide in smartphones. Microsoft claims that more than 2 million Windows Phone 7 handsets have been sold by manufacturers to retailers, but the exact number of those devices reaching consumers' hands remains elusive.

In the United States, the Nokia deal is unlikely to substantially affect that market share. According to comScore, Nokia fails to place in its Top 5 rankings of either OEMs or smartphone platforms. In the OEM scenario, that ranks it well behind Samsung, LG, Motorola and others; and in platforms, behind even Palm at 3.2 percent.

The global stage, however, offers a better opportunity for some Nokia-Microsoft synergy. According to new data from analysis firm StatCounter, Symbian holds some 30.7 percent of the global market, ahead of Apple iOS at 24.6 percent, Android at 15.2 percent and RIM at 14.5 percent.

If Nokia and Microsoft can maintain a healthy fraction of that Symbian-based market through the transition to Windows Phone 7, it would provide a substantial boost to Microsoft's platform. The billion-dollar question, though, is whether that erosion-free scenario can take place, particularly if users begin to see Symbian as a lame-duck platform. Per Kidd's research note, the lack of Windows Phone 7 devices from Nokia until 2012 may also have a negative impact.

So what does Microsoft get for its money?

The chance to make Windows Phone 7 a player on the international stage-provided it can execute hand-in-hand with Nokia. Considering the latter's minimal presence in the U.S. smartphone market, though, Microsoft may need another strategy if it wants Windows Phone 7 to succeed on these shores.