As far as smartphones go, Nokia (NYSE:NOK) and Microsoft (NASDAQ:MSFT) have already been in a tight spot for a while. But the two companies are maintaining their tight relationship, and could see a lot of money changing hands in the future.
Compared to Google’s (NASDAQ:GOOG) Android and Apple’s (NASDAQ:AAPL) iOS, the Windows Phone operating system hasn’t proven too popular — yet. In the fourth quarter of 2012, Nokia’s global smartphone sales didn’t even appear in a top-5 position.
Despite the individual weaknesses in the market, Nokia is choosing to stick with Microsoft, and new financial figures from Nokia show that the relationship dynamics might be shifting soon. While in the past Nokia had directly benefited from its arrangements with Microsoft, the tables could be turning.
There’s an odd 2-way stream of money between Microsoft and Nokia. Microsoft pays Nokia $250 million in “platform support payments” every quarter, and Nokia pays Microsoft royalties for using Windows on its devices. Up to now, this arrangement has worked in Nokia’s favor, as the royalties didn’t amount to the $1 billion it got from Microsoft each year, but that could be changing.
In October 2011, Nokia launched its Lumia smartphones, which are powered by Windows Phone, and sold just 1 million by the end of that year. A small figure like that wouldn’t amount to a very big royalty payment. However, Nokia’s Lumia sales changed significantly last year, with 14 million total sales for the year, and 4.4 million in the last quarter alone.
Nokia expects its Lumia sales to increase even more in the future. If Lumia sales rise high enough, Nokia’s royalty payments to Microsoft could surpass $1 billion per year, shifting the balance of the companies’ 2-way payments.
Though Nokia might be losing a little more money on the deal with Microsoft, the focus should be more on the Lumia sales, as both companies would benefit as Lumia sales increase. Nokia will boost its sales, and Microsoft’s smartphone OS will grow in popularity.
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