As we learned today, Microsoft is paying Nokia some $250 million (USD) a quarter to use its Windows Phone mobile operating system. At a rate of one billion dollars a year, Microsoft is betting heavily that its partnership with Nokia is not only fruitful, but transformative for both the Finnish giant and its smartphone platform; if not, the numbers likely won’t work.
Humorously, given the sheer scale of the money that Microsoft is theoretically making from its patent deals with the various Android OEMs, it could be argued that Google’s mobile ecosystem is funding Redmond’s Nokia subsidy.
Right, that’s a billion dollars a year to Nokia, assuming that the terms of the agreement were for at least four quarters. Early in the history of the Nokia deal, we heard of more than a billion dollars changing hands, so it could be that Microsoft signed an agreement for more than a year.
What might the money be used for? Aside from research, development, marketing (which is also funded through other Microsoft channels, if we are reading the situation properly), we now suspect that Nokia is subsidizing its handsets abroad. Here’s what we are talking about: the Lumia 900, Nokia’s LTE handset for the US market, is set to retail (rumor has it) for $99.99 with a contract. That is roughly half of what we expected. We posited yesterday that the low price for the phone will lead to it selling well, and perhaps dinging Android in the process.
There is a more subtle difference, however, in that the Nokia handset is set, in our view, to stifle other Windows Phone offerings from the various OEMs that support the platform. In other words, Nokia’s low price on the Lumia 900 is likely to harm HTC and Samsung phones in the US. Given the size of Microsoft’s payment to Nokia, it’s simple to wonder if some of that sweet, sweet Redmond cash is being used to keep Nokia’s phones artificially cheap.
If that is the case, Microsoft is not only favoring Nokia in terms of software, but is also paying them to beat on its other partners. We’ve requested comment from Microsoft on the matter, but don’t expect to here more than a ‘no comment.’ If we can find anything solid to back our theory, we’ll bring it to you here.
One last thing: even if the Microsoft cash is not directly going to subsidizing the phones, Nokia might be able to afford a much lower margin on the handsets simply because it’s not paying for its full R&D costs, and so forth. This is no small matter, as it influences the entire Windows Phone line of handsets. How long will the giants watch Microsoft cuddle with Nokia, and not demand a piece of the action?