When Microsoft and Nokia announced their blockbuster Windows Phone partnership, it was widely assumed that money would change hands in both directions. Indeed, during the partnership announcement, Nokia CEO Stephen Elop noted that Windows Phone was a "royalty-bearing product" for which Nokia would, like any other partner, pay licensing fees. But a new report from Bloomberg says that Microsoft may be paying the biggest upfront costs in order to seal the deal—to the tune of $1 billion.
That $1 billion payment will cover Nokia costs for promoting and developing Windows Phone-based handsets, the report claims. The report also notes that the partnership is a five-year deal. A portion of the $1 billion will be paid to Nokia before the latter company releases its first Windows Phone handset. That first phone is expected late this year.
And though Nokia will indeed pay a per-phone licensing fee for Windows Phone, those costs will be offset because Nokia will be substantially reducing its own research and development (R&D) budget. Previously, Nokia bore the cost of developing not just its own hardware but also the various software platforms it created and supported. The company spent an estimates 3 billion euros on R&D last year and hopes to cut that figure by at least a third.
Although the $1 billion payment will likely be paid back over time in the form of licensing fees, Microsoft is also paying for other Nokia intellectual property. It will license Nokia's various patents and integrate key Nokia technologies—including Nokia's Navteq mapping functionality—into the Windows Phone platform. The companies will divide any search and advertising revenues.
Microsoft and Nokia both declined to comment on the rumor, noting that the partnership agreement is still not finalized. But both companies could use some help in the smartphone market. While still popular, Nokia's current smartphone designs are stumbling in the market, and the company now controls 31 percent of the global market for smartphones, down from 35 percent a year ago.
And Windows Phone isn't exactly racing out of the gate. According to comScore, Microsoft's share of the US smartphone market actually fell 1.7 percentage points to 8 percent since Windows Phone launched. This means that Windows Phone hasn't reversed the slide that was previously experienced by its inept predecessor, Windows Mobile. According to comScore, the top three smartphone platforms in the United States are Google Android (31 percent, up 7.7 percent), Research in Motion BlackBerry (30 percent, down 5.4 percent), and Apple iOS (24.7 percent, flat year over year).