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Microsoft pays Nokia $1 billion to create WP7 devices

Microsoft is writing a check for $1 billion for Nokia to create Windows Phone 7 (WP7) devices. The payment is expected to cover promotion and R&D costs for WP7 mobile devices over a five-year period. The terms of the deal, which was struck in early February in Barcelona at the World Mobile Congress, positions Microsoft’s Windows Phone 7 mobile operating system as Nokia's primary smart phone platform. Although Nokia will pay Microsoft a fee for each WP7 handset it manufactures, the company will be able to drastically cut down on R&D expenditures. In return, Nokia is likely to see revenue from Microsoft, which will have access to Nokia’s Navteq mapping technology (for use with its Ad Center localized advertising system) and other Nokia patents.

Other ways in which this alliance will create synergies is through Microsoft’s Bing search engine, which is likely to run across Nokia’s handsets, and Nokia’s global operator billing arrangements that will give Microsoft even greater scope. Developers will have more incentive to write apps for the WP7 platform with Nokia’s great global reach.

The alliance came at a crucial time for both companies. Since Microsoft launched its WP7 platform in December 2010, its U.S. smart phone market share actually fell, by 1.7 points, to 8 percent. In comparison, Android has a 31.2 percent share, BlackBerry has a 30.4 percent share and Apple has a 24.7 percent share. Nokia has struggled in the marketplace.

When Nokia CEO Stephen Elop announced that it chose WP7 over Google’s Android, he said that he didn’t want to turn the smart phone market into a two-horse race between Google and Apple. By throwing Nokia’s worldwide reach behind WP7, Elop hopes that the operating system will become “a challenger” and prevent a duopoly. Nokia has not yet stated when its first Windows Phone 7 smart phones will be released, but they are expected sometime during this year.