(Source: WinExtra)
Deal shows some signs of progress

Nokia Oyj. (HEL:NOK1V) and Microsoft Corp. (MSFT) shocked the mobile phone world in Feb. 2011 when they announced a deep strategic partnership, which spelled the end of the competitive Symbian platform.  The criticism was quick to come and the union was slow to deliver.

But with in late 2011 the pair began to turn the corner.  

I. What did $250M USD Buy?  1M Windows Phones, Thus Far

The story is in the spotlight today after Nokia revealed in an earnings conference call that it had received $250M USD as part of a series of "platform support payments".  The revelation pulled back the cloak that Microsoft had been keeping over the deal, commenting only that it had made "significant investments" in Nokia.

Clearly Microsoft is living in bizarro world, paying a third-party $250 USD per handset, approximately.  By contrast Apple, Inc. (AAPL) gets paid approximately $600 USD per handset.  Microsoft made $6.6B USD in profit for the quarter, so it has some money to play with.  And at this point Microsoft doesn't have much choice, as customers simply aren't lining up in the heat or cold to wait for the latest Windows Phone.

When looking the $250M USD payout, the big question is -- was it worth it?

The bad new is that Nokia did lose a massive €954M ($1.254B) for Q4, despite the payment.  The loss plunged its fiscal calendar 2011 to a loss of €1.073B ($1.411B).  For the quarter Nokia clung to its top spot in global feature phone sales, shedding only 1 percent.  But smart phone sales plunged by almost a third (31%).  

Aside from the sales, further signs of Nokia's struggles can be seen in its €1.090B ($1.434B) partial impairment (reevaluation of assets) concerning "goodwill" -- an accounting term that indicates brand reputation.  In other words, Nokia admits financially, at least, that its brand took a massive hit in 2011.

The pressing question is what will happen next.  Nokia's biggest problem is that it's scrapping its Symbian smartphone lineup, but lacks as diverse a Windows Phone family to replace it at present.  Nokia did sell 1 million Windows Phones in Europe in Nov.-Dec. 2011 with only two models -- the Nokia Lumia 710 and 800.

Lumia 800 and 710

The Nokia Lumia 800 (left) and 710 (right). [Image Source: Nokia]

With U.S. sales kicking off with the Lumia 710, which just went on sale on Deutsche Telekom AG's (ETR:DTE) T-Mobile USA, and with a slick new superphone -- the Lumia 900 -- landing in the U.S. and Europe later this year, Nokia has the potential to pick up some steam.

The Nokia Lumia 900. [Image Source: Nokia]

Nokia financials -- while seemingly bad -- were better than analyst expectations, as were its smartphone sales.  Analysts expected Nokia to only sell ~18.5 million smartphones for the quarter, but the better-than-expected Windows Phone launch dragged in 19.6 million.  By contrast Apple sold 37 million smartphones for the quarter -- putting it in first place globally -- followed closely by Samsung Electronics Comp., Ltd.'s (KS:005930) 35 million Android smartphone sold.

II.  2012 is Windows Phone's Biggest Test Yet

The big test will come this year as Microsoft and Nokia work to bring Windows Phone to emerging markets -- a place where Nokia's budget smartphones have traditionally outperformed Apple and Samsung.  Nokia is the top smartphone seller in China, which recently passed the U.S. to become the biggest market.  It outsold Samsung smartphones nearly 2-to-1 in China.

Nokia and Microsoft have what looks to be a winner -- attractively packaged smartphones with a slick, intuitive, colorful operating system.  The key test in terms, aside from the transition on the budget smartphone end in China, will be how much traction Nokia can get with U.S. carriers.

Nokia Lumia 800
Nokia faces unique challenges both in the U.S. and abroad [Image Source: Nokia Blog]

AT&T, Inc. (T) has announced that it will be carrying the Nokia Lumia 900.  Given AT&T's focus on the Lumia 900 at CES 2012, it can be presumed that AT&T will market this as the "premium" Windows Phone model (despite the HTC Corp. (TPE:2498Titan II carrying slightly better specs).  

The real test is whether Nokia can "pull a Samsung" and crank out a repackaged Lumia 900 (or some similar high-end offering) to sell on America's largest carrier, Verizon Wireless (Verizon Wireless is a joint subsidiary of Verizon Communications Inc. (VZ) and Vodafone Group Plc. (LON:VOD)).

If Nokia can manage to squeeze on Verizon and get a firm commitment out of the top U.S. carrier, it will have devices available to around 80 percent of American consumers.  That's a big deal.
  1. So to recap, Nokia's earnings are better then expected, but a loss is still a loss.  Nokia's homework in 2012 will be to:
  2. Successfully transistion its budget lineup to Windows Phone
  3. Carry out a strong Lumia 900 launch on AT&T
  4. Lure Verizon into a H2 2012 launch
Even if they don't like Nokia's devices, Windows Phone fans should be rooting for Nokia to pull off this turnaround.  Because for better or worse, both companies' smartphone futures are now intimately tied to each other in terms of brand image and finances.

Sources: Nokia [earnings], Microsoft [earnings], Bloomberg, Slashgear

"If you look at the last five years, if you look at what major innovations have occurred in computing technology, every single one of them came from AMD. Not a single innovation came from Intel." -- AMD CEO Hector Ruiz in 2007

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