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Microsoft Throws $1B at Nokia, but Shouldn't Expect Much In Return

Microsoft (MSFT) is giving Nokia $1 billion to create and promote Windows-based handsets. The huge number and the speed with which the deal got done show how desperate Microsoft is to catch up to Apple (APPL) and Google (GOOG). Trouble is, it may still not get the job done.

Here's the gist of the deal via Bloomberg:

Nokia will pay Microsoft a fee for each copy of Windows used in its phones, costs that will be offset as Nokia curtails its own budget for software research and development, said one of the people, who declined to be identified because the final contract hasn't yet been signed. The agreement runs for more than five years, the people said.

Based on what we know, Microsoft is handing a cool billion to Nokia to create Windows-based smartphones, and Microsoft will eventually get the money back by taking a piece of each unit sold. Microsoft should realize that it may not ever get its money back -- or even stop Apple and Google's dominance over the mobile market.

Not a big return on investment
Microsoft has made several questionable assumptions here. First, it assumes that Nokia will sell enough smartphones to pay back the $1 billion through royalties -- which, based on what we know, is the point of the deal. It's unclear how much Microsoft will get per phone sold. However, consider that even the iPhone, the most popular smartphone line on the planet, has only sold 100 million units in four years. And Nokia phones aren't exactly selling like hotcakes.

Money aside, if Microsoft is purely focused on getting more of the mobile market, it's doubtful that Nokia will be able to sell enough units to pull app developers away from Apple and Google. The best Microsoft can hope for is that developers create for Nokia devices in addition to Apple and Google devices. Getting developers to create exclusively for the Windows-based Nokia phones would require tens of millions of users -- which the Apple and Google platforms already have.

Always room for one more... not
Second, there is the assumption that there is room for yet another major smartphone competitor. Here's the current mobile platform market, according to Nielsen:

  • Android 29%
  • Blackberry 27%
  • Apple iOS 27%
  • Windows 10%
  • Palm 4%
  • Nokia 2%
So the owner of 10% of the market is throwing money at the owner of 2% of the market to get ahead of the game? Microsoft and Nokia announced their mobile partnership last month and it made sense, but a $1 billion investment out of the gate seems foolish. Microsoft doesn't even know if Nokia can deliver the goods.

Take two tablets and call me in the morning
Finally, Microsoft is rather short-sightedly focused on smartphones. Its billion bucks won't, for instance, make it any headway in the tablet market being pioneered by Apple, Google, and Palm. It would be much smarter to spread the investment into not only Nokia phones, but all its portable devices. More than 100 tablets are expected to launch this year, and Microsoft is kidding itself if it believes that it can wedge its way into the mobile market just by buying its way into smartphones.

The big winner here, of course, is Nokia. Fresh off a dying platform, it gets a chance to cut back on its own R&D budget and experiment with Microsoft's money.

Photo courtesy of Nokia

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