Microsoft is believed to be paying Nokia more than $1 billion to develop and market mobile phones run on Windows.
Nokia will use Microsoft’s Windows Phone system as its primary platform, effectively abandoning its own software. Microsoft will be paying a large amount to have its software, which is falling behind competitors such as Apple and Google, installed on most future Nokia devices.
In return, Nokia will pay Microsoft a fee for each copy of Windows installed on its devices, which could mean Microsoft will begin to turn a profit on the venture only when Nokia sells enough phones. Nokia will offset the cost of these royalties by cutting its own substantial budget on research and development.
Reports on the agreement emerged yesterday, but it is thought that the final contract between the groups has not yet been signed. The agreement is expected to last more than five years.
The move is the last gamble for Nokia, which has suffered sharp falls in profits, as well as a significant boost for Microsoft, previously viewed as an also-ran in the booming smartphone market.
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Nokia has been outflanked by Apple with its iPhone. In February, the Finnish company lost its decade-long position as the world’s leading supplier of smartphones to Android, Google’s operating system for mobiles, according to analysts.
Since Stephen Elop, Nokia’s chief executive, announced the moves last month, the company’s shares have fallen by more than a quarter. This fall reflects concerns about the Microsoft deal and the competitiveness of Windows, which has only a few percentage points of the smartphone market.
Mr Elop has said he talked to Google about adopting Android as its software, but ultimately chose Microsoft’s Windows as it offers a greater chance to differentiate its products from rivals and ultimately make larger profits.
He has said the deal with Microsoft was needed to make the battle over smartphones into a “three-horse race” that is currently being led by Apple and Google.
“This gives Microsoft scale and allows Nokia to rip out costs,” said Colin Gillis, an analyst at BGC Partners, said. told reporters.
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“Microsoft is getting the platform boost that comes from acquiring a Nokia for about $1 billion.”
Analysts said that Nokia is looking to cut its budget for research and development for the next two years by about €1 billion. Last year the company spent €3 billion developing new handsets, products and services.
The deal with Microsoft is part of a series of aggressive moves by Mr Elop, who took over at the helm of Nokia in September last year, designed at arresting the group’s recent decline. This includes effectively abandoning Symbian, its own mobile software, and a wide-ranging management overhaul.