In case you hadn’t read this; Microsoft will reportedly be paying Nokia one billion dollars over 5 years to use the Windows Phone OS on its hardware.

How does this kind of deal work?!  My simple mind doesn’t quite get it.

Microsoft is buying the business

Since it's in the business of making money you would think Microsoft would pay out...nothing.  Rather they should be charging Nokia for the use of their mobile OS.  So, why the one billion dollar spiff?  Perhaps they are taking a long term...scratch that, a very long term approach.  Perhaps it’s all about paying for the increased exposure to reap the benefits after the 5 years is up.

Obviously, if things take off with sales of Nokia WP7 devices they could make some kind of profit before the five years is up, but that seems like quite the gamble.  No doubt, Microsoft can afford to throw around a billion here and there but there needs to be an end game somewhere in there.

Stave off competitors

Nokia certainly had a choice in switching from their own Symbian OS with the obvious alternative being Android.  Microsoft's investment (what in the world do we call this?) in Nokia may have simply been to keep Android out.  It may just have been the cost of having Nokia as a partner and keeping Google from placing a nail in Windows Phone's coffin.  I don't mean to suggest that Windows Phone was dead if not for this partnership but sales have certainly not been stellar.  Android is increasingly dominating the mobile space and a partnership with Nokia would have been HUGE!

While we're discussing Android, let me just say that I don't think Android would have been a good choice for Nokia.  There are some very strong Android based manufacturers already and the potential for Nokia to be lost in the noise would have been high.

Convincing Nokia

While it's possible Nokia was looking for Microsoft to show commitment to its own platform by committing to this investment I don't think that plays a significant part in this.  Clearly Microsoft is committed to Windows Phone's future, but that wouldn't keep Nokia from using that as a bargaining chip.  Wow...when did I become so cynical?

Appeasing current partners

Microsoft could have easily packaged this deal as a discount or as free licenses up to a point; at least, they could if it didn't violate current partner agreements.  No doubt there are clauses to keep license fees consistent between partners which would have kept Microsoft from giving Nokia concessions.  Instead they offered a rather large gift basket; an offer they couldn't refuse.

I know, I'm getting cynical again but its certainly possible that this was the only way for Microsoft to work around current partner agreement.

Final thoughts

In the end, the justification for the jackpot is probably some combination of the above.  These are the things only those in the boardroom will know for sure; but I have to think its a good deal for all.  Nokia gets both a windfall and a solid platform they can offer their customers.  They have license to make customizations, building on a solid OS.  Microsoft gets a new partner, a huge partner for a sum they can certainly afford.  There will be a renewed interest in Windows Phone as devices become available and an increase in developer interest.

Probably the biggest benefit is for consumers.  We will have more choice in hardware and OS advancements from both Nokia and Microsoft.

And it only cost Microsoft a measly one billion!