Bloomberg recently reported that Nokia Corp. (NOK), the largest mobile phone maker of the world, is all set to enter into a deal with Microsoft Corp. (MSFT). As per the deal, Microsoft will pay approximately $1 billion to Nokia for promoting Windows Phone 7 software.
Last month, Nokia took a historic decision to adopt Windows 7 software for all its forthcoming smartphones, thereby sidelining its own operating system Symbian and the much-hyped Linux-based MeeGo software.
According to the 5-year agreement, Microsoft will pay around $1 million to Nokia including an upfront payment and Nokia, in turn, will use its expertise in hardware design and language support to enhance the Windows Phone 7 platform in areas like imaging. Microsoft will also get a royalty of roughly $15 per handset from Nokia, once it starts to roll out the new Windows mobile phones in early 2012.
Nokia faces stiff competition from Google Inc’s (GOOG) Android-based smartphones and Apple Inc’s (AAPL) iPhones. Nokia desperately needs a smartphone to outperform the broader mobile phone market. Nokia has thus teamed up with Microsoft to install Windows Phone 7 software into their mobile phones, as an attempt to retain its market share.
However, we do not expect any Windows 7-based smartphone before the end of 2011. Further, we expect Nokia to gradually lose market share since we do not find any product in Nokia’s existing portfolio, which is unique in the market.
Windows is the most powerful and widely-used operating system for PC/notebook throughout the world, especially in the U.S. We believe its smartphone counterpart may enable Nokia to get a meaningful foothold in the lucrative North American market, where historically the company never finds any reasonable acceptance.
Additionally, Windows Phone 7 software is still not commoditized. Samsung and HTC are the two big players, who have developed some devices using this operating system. This signifies Nokia has the opportunity to differentiate its offerings using its skilled workforce and marketing strategies.
We, thus, maiantain our long-term Neutral recommendation for Nokia. Currently, Nokia has a Zacks #4 Rank, implying a short-term Sell rating on the stock.
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