Nokia and Microsoft: Economics, risks of a 2-year transition to Windows Phone 7

Nokia and Microsoft: Economics, risks of a 2-year transition to Windows Phone 7

Summary: The economics for Microsoft and Nokia may work out, but the biggest unknown is whether the phone maker can endure a two-year transition to Windows Phone 7 devices in a mobile world evolving so quickly.

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For today, the focus of the Microsoft and Nokia partnership revolves around smartphones, Windows Phone 7 and an app ecosystem, but the economics of the pact will soon move to the front. The biggest unknown is whether Nokia can endure a two-year transition to Windows Phone 7 devices in a mobile world evolving so quickly.

In many respects, the Microsoft-Nokia partnership is similar to the search pact the software giant has with Yahoo. Microsoft pays for share and the partner can focus, cut research and development spending and lay off employees to become more efficient.

Here's a look at what's known at the moment. Also see: Nokia/Microsoft partnership - Winners and losers

Benefits to Nokia:

  • According to the New York Times, Nokia was offered "hundreds of millions" in engineering assistance and marketing support. Needless to say, Microsoft paid Nokia nicely.
  • Nokia gets to pare down a bloated corporate structure. Nokia CEO Stephen Elop on Friday alluded to cost cutting, job retraining and layoffs ahead. Reuters notes that there may be "thousands of layoffs ahead."
  • With a pared down structure, Nokia can focus, become more streamlined and potentially get a cut of future ad revenue via Bing and location based services.
  • Microsoft's marketing budget can help Nokia break into the U.S. and open a new market.
  • CNet News' Stephen Shankland quotes Elop: "We have different forms of value transfer in different directions. We have new opportunities that come from advertising and new forms of monetization." It's safe to say Nokia comes out ahead on the payment side of the equation.
  • It's unclear what Nokia spent on software development, but this chart highlights how costs will be dropping dramatically. Nokia will ship Windows Phone 7 devices in volume in 2012 as Symbian is phased out, support costs will decline.

Benefits to Microsoft:

  • Microsoft gets distribution for its Windows Phone 7 OS. It's unclear what the licensing arrangement is between Nokia and Microsoft, which will collect undisclosed royalties.
  • The software giant dents what could have been mobile domination by Google.
  • Microsoft will get more developers on board due to Nokia's global distribution.
  • Note many of the benefits to Microsoft are intangible. Microsoft becomes a mobile player again, but as we know from the company's Internet efforts---profits can be elusive.

Risks to both:

The biggest risk to Nokia and Microsoft is the transition period. Nokia indicated a two year transition period to Windows Phone 7 devices. The smartphone market operates in dog years. Two years is an eternity and if consumers don't play ball with Nokia and Microsoft, both companies could become irrelevant.

Stifel Nicolaus analyst Doug Reid noted:

Nokia’s planned transition period to a Windows Phone smartphone OS world appears to be slow. Notably, Nokia did not announce a Windows Phone product. Interim plans for multi-OS support to add to cost burden during long path to market share recovery. Curiously, Nokia plans to proceed later in 2011 with the introduction of a smartphone based on Nokia’s MeeGo platform. Nokia also plans to continue to launch new Symbian-based devices, with plans to ship up to 150mn such devices. CEO Stephen Elop indicated that the agreement with Microsoft was non-exclusive and that 2011 and 2012 would both be transition years for Nokia. Nokia declined to provide clear guidance for 2011, citing uncertainty related to the OS transition.

In other words, this two-year transition period is going to mean some economic pain for Nokia. Barclays analyst Andrew Gardiner crunches a few numbers:

The one piece of financial guidance provided by Nokia was that they expected Devices and Services operating margins to return to greater than 10% following the transition period of 2011 and 2012. Implicitly, they are therefore guiding for margins to be below 10% in this year and next, which is below our current estimates of 11% and 13%.  This assumes a steady deterioration in industry gross margins.  Nokia currently posts 29% gross margins.

Bottom line: Nokia is in for a rough two years and when it emerges with Microsoft's mobile OS it's unclear what market share base it will be working from.

More: Nokia statement, Microsoft statement and open letter

Topics: Microsoft, Hardware, Mobility, Nokia, Operating Systems, Smartphones, Software, Windows

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19 comments
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  • RE: Nokia and Microsoft: Economics, risks of a 2-year transition to Windows Phone 7

    Transition shouldn't be a problem. You are overlooking the fact that both Microsoft and Nokia have been offering mobile products for years. Their strategy should be easy enough to get going. Nokia is known for its hardware and Microsoft Windows Phone 7 has been getting glowing reviews. Very little risk at all in this.
    Loverock Davidson
    • Its a huge risk

      @Loverock Davidson <br>You failed to read the article, it is big risk.
      choyongpil
    • huh?

      @Loverock Davidson
      "Very little risk at all in this"...what are you smoking?
      This is another nail in M$ coffin and another foot deeper in Nokia's grave!
      Only Android can save Nokia and GPL can save M$.
      Linux Geek
  • RE: Nokia and Microsoft: Economics, risks of a 2-year transition to Windows Phone 7

    I think Elop should explain his 2011/12 will be transition years comment more clearly. Mabye he means that it will take that long before their high-end (with WP7) are selling enough to a factor again.
    Mythos7
  • RE: Nokia and Microsoft: Economics, risks of a 2-year transition to Windows Phone 7

    I wonder if this is just a thought they made public or have they actually tried putting WM7 on some Nokia devices. I see potential, I just think it'll suck to have to wait until 2012 to see what will come of it. I was looking forward to another device at the end of the year and was nearly set on Nokia v Android. Now... No options!

    I already have a N900 which is no longer supported by Nokia a year after its introduction. Not gonna fall in that hole again.
    dharder
  • The smartphone market operates in dog years? Give me a break!

    The smartphone market is one of the most volatile markets around, with people switching all the time to whatever is the "newest or greatest or coolest" in the market at the time. Thus, there is very little or no lock-down for any one device maker or any one platform.

    In the mobile market, the switching is occurring all the time, from one device to another, from one OS to another, and so, there again, the dog years analogy fails. The "dog years" become insect years, where many insects die within a few days or weeks after they're born.
    adornoe
    • RE: Nokia and Microsoft: Economics, risks of a 2-year transition to Windows Phone 7

      @adornoe@...

      Good point, and I caught that "dog years" comment as well, whicih is completely inaccurate. In fact, the mobile market is probably the fastest moving we have seen in our generation. Even the Internet wave in the mid to late 90's took years to evolve, but the mobile market has players introducing new hardware and platforms annually. The carriers are running as fast as they can to get to LTE/WiMAX capable towers and hardware.

      Currently the game is a sprint, but like most races, will eventually turn into more of a 5K than a 100 meter dash!
      omdguy
  • I think 2 years is the total transition time. I'd bet nokia has WP running

    on devices already. They'll have to ship the symbian stuff at the low end until the transition completes. But I expect to see high end WP's coming out of them in time for xmas '11. and the r+d savings can start immediately...
    Johnny Vegas
  • Jumping to a burning platform

    The main problem with Symbian was the UI, but still it was the highest selling smartphone OS last year, with an almost 40% increase in year-on-year sales. So, instead of improving the UI, they decide to replace that with an offering of the only entity who managed to have a decrease in shipments last year! Great going Elop: you decide to jump from a heated area of the platform right into the fire! No wonder the Nokia shares are plummetting after the announcement!
    nilotpal_c
    • RE: Nokia and Microsoft: Economics, risks of a 2-year transition to Windows Phone 7

      @nilotpal_c I also don't understand why Nokia would give up the most popular OS for WP7 that might not last as long as the hardware running it. The Symbian OS has been a wonderful phone system for me for over 10 years. I have an easier time finding settings on my Nokia phones than almost every phone a coworker handed me and asked for help with. The UI really isn't the problem, it's the marketing of which I see none of in the USA. Apple and the various Android phone makers are marketing the new phones all over the place, just saw back to back Android phone commercials while I was typing this. Nokia could easily brag about the great hardware it has and start the revival of Nokia in the US. The US market added to its current worldwide market would marginalize iOS and Android.
      techrepublic@...
  • Let's wait to see their SEC filings where the real details lay

    I might add two (2) years is an 'eternity' in the high technology world.

    A lot can happen.
    Dietrich T. Schmitz, ~ Your Linux Advocate
    • RE: Nokia and Microsoft: Economics, risks of a 2-year transition to Windows Phone 7

      @Dietrich T. Schmitz, Your Linux Advocate <br><br>True. Google might stumble under a new (old) CEO. Apple's CEO might just bite the big one and that company might find out he really *was* the special sauce.<br><br>Who knows.<br><br>I think MS is in for a very, very tough fight. I suspect they will eventually "lose". But that day is at least a decade away, and probably a lot more than that. They are big enough, smart enough, and profitable enough to fight for a long, long time.<br><br>They are also scrappy enough that they just *might* "win."<br><br>This should be fun!
      x I'm tc
      • RE: Nokia and Microsoft: Economics, risks of a 2-year transition to Windows Phone 7

        @jdakula

        I don't think they'll ever "loose" - look at AOL and all those other "dead" companies..... still rocking it.
        The one and only, Cylon Centurion
      • RE: Nokia and Microsoft: Economics, risks of a 2-year transition to Windows Phone 7

        @Cylon Centurion 0005 <br><br>Thus the quotes. These things aren't really competitions in the way the fanboys like to think about it. Both Google and MS can be big, profitable companies who's presence as competitors makes the other better.<br><br>As consumers, we really shouldn't have rooting interests, except our own!
        x I'm tc
  • RE: Nokia and Microsoft: Economics, risks of a 2-year transition to Windows Phone 7

    Transition from Yahoo to Bing also was complex but they seemed to mange it quite well. This also will be okay, just wait and watch, we'll have at least couple of WP7 Nokia phones for this year holidays season, I bet.
    deep@...
  • It won't be 2 yers for the simple fact that both know...

    They cannot wait 2 years.

    My guess is that Nokia has phones runnning WP7 as I type this and that you will see devices this year, and on multiple carriers once MS released NoDo which will have CDMA capabilities (hello Verizon).

    What is also fascinating about this is the low end "dumb" phones which Nokia owns that market so being able to take an innovative platform like WP7 (which I truly consider innovative unlike iOS or Android) to a wide spectrum of devices which will have (and currently has) very broad developer support, I foresee big things from this relationship. We are going to see nice hardware from Nokia at prices that Apple simply can't match. I think 5 years from now the battle will be between Android and Microsoft on the platform side and Apple will reside where they always have, as an expensive niche offering.
    omdguy
  • It will be interesting to Watch...

    While there's protagonists predicting the imminent crash and burn of almost every platform, the reality for big companies is that they make mistakes and can afford to bleed for years without going out of business. Often one gets ahead, not because they made some amazing breakthrough, but because a major competitor stumbled.

    I have been a Palm PDA user since their second model. Palm led the PDA market because they got PC / PDA Synchronisation right, Graffiti (handwriting) input, and PalmOS was very stable. In a nutshell, "it worked." Nobody else seemed to achieve Palm's level of simple elegant one touch synchronisation across ALL APPS.

    The Palm stumbled and fell... No Palm owners liked Graffiti-2. It was a step backward, but the big mistake was outsourcing PalmOS development. Nothing happened for two years, during which the competitors caught up and overtook Palm, who could do nothing because they no longer controlled development of their OS.

    SmartPhones grew alongside PDAs but until recent years, they did not really have fully fledged PIM applications and still have poor PC synchronisation.

    I've moved to Android (HTC flavoured) and while I love the product functionality and ecosystem, the platform still lacks the true PC synchronisation framework that ALL applications can hook into.

    Marketers have their heads in the "clouds", but I and many others don't want their personal data in someone else's cloud, or to be inaccessible when the phone is out of range of a network.

    Bottom line.... Everything else being equal, the company / platform that combines a popular ecosystem with ease of use AND Paml-like PC Synchronisation will experience a jump in popularity.

    I don't like what I've read about WP7, and I cannot see myself moving from Android, but then It was Palm who forced me to jump, not the attractiveness of Android.

    WP7 ain't dead by a long chalk.
    david.hunt@...
  • RE: Nokia and Microsoft: Economics, risks of a 2-year transition to Windows Phone 7

    My farewell letter to Nokia (sent to Nokia on 1.31.2011):

    Dear Mr. Elop,

    TODAY IS A SAD DAY IN MY DIGITAL LIFE: Today is the day that I officially made up my mind to leave my beloved NOKIA brand; for new and uncharted ANDROID waters.

    I have been a LOYAL NOKIA owner and fan for almost 20 years. NOKIA has afforded me the opportunity to stay ahead of the technology curve; NOKIA has afforded me the opportunity to be the talk of the town in and out of my social circles with the most cutting edge phones (most people had never even seen or even dreamed of the capabilities that a cellphone could do, until I showed them a NOKIA); NOKIA has allowed me to boast to my friends about how I paid $600 for a "phone"--and could show and explain to them why I paid that much for a "phone"--cutting edge technology; NOKIA has afforded me the opportunity to be in LOVE with the SYMBIAN OS for the past twenty years; an operating system that was unmatched by ANY competitor.

    Well, that love affair is now the problem. NOKIA for some odd reason, has become very complacent on the smartphone frontier. This ecosystem has been turned upside down by the likes of Apple and Google. I have a N95. When Apple debuted with the iPhone four years ago I was saddened that NOKIA hadn't debuted with like technology first. I purchased an iPhone to see what all the buzz was about. Hah! Nothing! My N95 ran circles around the iPhone; the only thing the iPhone had on my n95 was the touch screen interface. I just knew my beloved NOKIA was in the lab creating "the next big thing".

    Fast forward summer 2010. I purchased a n97 mini. Good phone. However when I went to my family reunion that summer, my cousin had an HTC ANDROID powered phone. She showed me all the cool apps , gadgets, and features. Everyone gathered around the picnic table to partake in her impromptu "presentation"----she even asked me some questions about the phone that she "knew" I would know. But I didn't have a clue. Nothing to bring to the picnic table---I couldn't even bring my NOKIA n97 Mini to the table. Her ANDROID phone would have blown it away. I suddenly had a major epiphany--for the first time in my life, I was no longer the talk of the town; I was no longer the envy of the crowd; I was no longer the person with the cutting edge technology. I was utterly devastated. I sheepishly slid away from the picnic table; away to the lakeside, peering out into the waves; pondering my digital future.

    Well, after months of excruciating frustration in trying to make myself "love" my glorified n95 (n97 Mini), I have come to the tough decision and conclusion that I must part ways with my NOKIA SYMBIAN OS brethren. The n97 is the worst phone experience I've had in my entire life!! That includes when I used to help people set-up their MOTOROLA RAZR's. The phone is a good phone for 4 year-old technology; it's basically an n95, with a few enhancements here and there. The phone does not sync correctly with Bluetooth devices; my laptop; my desktop; Ovi Suite; PC Suite----There's always some issue with my phone. It mysteriously turns off and then turns back on. Overall the phone is garbage, and I'm leaving my first love for another-------MOTOROLA DROID X!!!

    There....I said it....It wasn?t an easy decision?.I'm sorry....but I have to go.....I MUST bid farewell....no hard feelings....Good luck, I hope you find your way.

    Love Always---Your Ex,
    HulkSmash3000
  • Nice phone

    Whatever would be the risk factor, but I think Nokia will gain its position again in the market.
    http://www.nokiaphonereview.net
    krikhav