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For Nokia, It Pays To Be a Microsoft Partner. But Does It Pay Enough?

It was a day of reckoning for Nokia Inc., which is arguably Microsoft's most important strategic partner. By the numbers, the Espoo, Finland-based mobile phone maker's Symbian business is collapsing faster than expected while the nascent Windows Phone business is starting to boom -- also faster than expected but not fast enough to offset the Symbian shortfall.

Nokia reported its quarterly and full-year earnings on Thursday. The quarterly results showed a 21 percent drop in net sales and a 73 percent decline in earnings per share.

Run by former senior Microsoft executive Stephen Elop, Nokia is trying to execute a delicate shift in gears. The company is trying to de-emphasize the once-dominant but now seriously outdated Symbian OS-based line of smartphones while spinning up a new line of products based on Windows Phone.

Part of the decline in sales and earnings for Q4 came because of the "faster decline of our Symbian volumes than we anticipated," Nokia noted in its earnings release, which read:

"Following the announcement of our strategic partnership with Microsoft in February 2011, our strategy included  the expectation to sell approximately 150 million more Symbian devices in the years to come. However, changing market conditions are putting increased pressure on Symbian. ... We expect this trend to continue in 2012."

While the company will continue to support Symbian customers with software through 2016, the company took charges in Q4 2011 for excess component inventory and future purchase commitments related to the realization that Symbian is not going to approach that 150 million sales figure.

Yet Nokia's shares traded higher after the earnings release. Part of the Symbian decline had already been priced into the stock, when a Symbian supplier warned investors of lower sales earlier this week.

But a bigger part of the stock boost is being attributed to Nokia's confirmation Thursday that it has sold "well over" 1 million Lumias, the new devices built to run the Windows Phone OS. The Lumia 710 and the Lumia 800 were announced in October, and started shipping in international markets in November and December. T-Mobile began selling the Lumia 710 earlier this month in the United States. Meanwhile, the most buzz-worthy device in Nokia's lineup, the Lumia 900 for AT&T was a hit at the Consumer Electronics Show and is rumored to be going on sale in the United States in mid-March.

In a statement, Elop employed military imagery to describe for investors the company's plans for fighting its way back into the smartphone market. "In the war of ecosystems, clearly there are some strong contenders already on the field. And with Lumia, we have demonstrated that we belong on the field. Our specific intent has been to establish a beachhead in this war of ecosystems, and country by country that is what we are now accomplishing," Elop said. "From this beachhead of more than 1 million Lumia devices, you will see us push forward with the sales, marketing and successive product introductions necessary to be successful."

That ability to jump into the market and immediately sell 1 million smartphones makes clear why Microsoft has been willing to invest so much in the Nokia partnership. Nokia's earnings releases Thursday also revealed exactly how much Microsoft's rumored payments to the mobile device giant amounted to:

"Our broad strategic agreement with Microsoft includes platform support payments from Microsoft to us as well as software royalty payments from us to Microsoft. In the fourth quarter 2011, we received the first quarterly platform support payment of USD 250 million."

Put another way, Microsoft paid Nokia almost $250 for every phone that's shipped so far, although the economics of the deal are sure to get substantially better for Redmond as production and marketing ramps up -- and as Nokia starts paying more in software royalties back to Microsoft.

Nokia softened the harsh declines in revenues and earnings with news of a dividend for investors. At the same time, Elop encouraged investors to keep their focus on the long term, "With a strong balance sheet, our performance in mobile phones and the new excitement around Lumia, we are confident that we are on the right track to build long-term value."

All in all, the Nokia earnings are one of the first signs that Microsoft may really be able to get some traction with Windows Phone after more than a year of mostly spinning its wheels. That said, as Microsoft has struggled for traction, Apple keeps moving the bar higher; Apple executives announced earlier this week that Apple sold 37 million iPhones in the quarter.

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Posted by Scott Bekker on January 26, 2012 at 11:58 AM


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