A new Nokia filing reveals that Nokia will end up paying Microsoft at least $650 million more to Microsoft than Microsoft will have to pay to Nokia during the remainder of their Windows Phone agreement, even if Windows Phone bombs. That's just one more sign of what a good deal the pact has been for Microsoft.
The SEC requires that foreign companies file Form 20-Fs every year to describe in detail a company's business, in the same way that the SEC requires domestic companies to file a similar form. The forms provide investors with a great deal of financial information about companies, with an eye towards deciding whether to invest.
The deal that Microsoft and Nokia signed was a complex one, with payments flowing in two directions. Microsoft pays "platform support payments" to Nokia to help the company standardize on and market Windows Phone devices. Nokia pays Microsoft royalty payments for use of Windows Phone on its devices.
So cash has been flowing in both directions. Until 2012, Nokia reports in the Form 20-F, Microsoft has been paying more in platform support payments than Nokia has been paying in royalties. So Nokia has been profiting. But that's going to end. After 2013, for the duration of the agreement, Nokia will have to pay Microsoft a minimum of 500 million Euros, which adds up to about $650 million in U.S. dollars. Here's what Nokia says in the filing:
As of the end of 2012, the amount of platform support payments received by Nokia has exceeded the amount of minimum software royalty commitment payments made to Microsoft, thus the net cash flows have been in our favor. As a result, the remaining minimum software royalty commitment payments are expected to exceed the remaining platform support payments by a total of approximately EUR 0.5 billion over the remaining life of the agreement.
Keep in mind that's a minimum software royalty commitment, which means that even if Windows Phone 8 bombs, Nokia has to pay that money.
That excess money being sent Microsoft's way won't kick in during 2013, the filing says, because for 2013, Microsoft will still be paying more to Nokia than Nokia will have to pay to Microsoft.
Keep in mind that the $650 million doesn't represent the total amount more that Nokia will pay to Microsoft over the entire agreement than Microsoft will pay to Nokia. So far, Microsoft has paid more to Nokia. For the entire agreement the filing says, Microsoft will likely end up paying more to Nokia than Nokia will pay to Microsoft.
Over the life of the agreement the total amount of the platform support payments is expected to slightly exceed the total amount of the minimum software royalty commitment payments.
In the filing Nokia is required to lay out all the risk factors it faces. As always, in these types of filings, this section can make for hair-raising reading. One of the more interesting dangers if the latest version of Windows, Windows 8, doesn't take off:
Microsoft has recently launched the Windows 8 operating system used to power personal computers and tablets, and the related Windows Phone 8 operating system is used in the latest Nokia smartphones. The success of Nokia's Windows Phone 8 smartphones will be negatively affected if the Windows 8 platform does not achieve or retain broad or timely market acceptance or is not preferred by ecosystem participants, mobile operators and consumers.
The filing shows once again that the Nokia deal was a very smart move for Microsoft. Without a major phone maker committed to Windows Phone, the smartphone OS would never have been able to succeed. Microsoft was able to do that without ultimately having to spend much money. Over the life of the agreement, Microsoft will ultimately pay not a great deal of money to Nokia. That's quite a deal, at least for Microsoft. It's not at all clear whether it was a smart move for Nokia.