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
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