Not too late for Nokia to back out of Microsoft partnership

Redmond reportedly paying Finnish company $1 billion to make, market WP7 phones

We all knew Microsoft was paying Nokia something as part of the smartphone partnership announced between the companies a month ago. (Also see: Microsoft-Nokia: A marriage of mobile mediocrities and Stephen Elop's secret 10-point plan to save Nokia) Now we have some idea of how much. From Bloomberg's Dina Bass: Microsoft Corp. will pay Nokia more than $1 billion to promote and develop Windows-based handsets as part of their smartphone software agreement, according to two people with knowledge of the terms. Nokia will pay Microsoft a fee for each copy of Windows used in its phones, costs that will be offset as Nokia curtails its own budget for software research and development, said one of the people, who declined to be identified because the final contract hasn’t yet been signed. The agreement runs for more than five years, the people said. Bass quotes an analyst who thinks the arrangement is a good one for Redmond: “This gives Microsoft scale and allows Nokia to rip out costs,” said Colin Gillis, an analyst at BGC Partners in New York, who recommends buying Microsoft shares. “Microsoft is getting the platform boost that comes from acquiring a Nokia for about a billion dollars.” No doubt, financially, this is a bargain arrangement for Microsoft -- if it results in an effective partnership that produces respectable smartphone market share. However, since we're talking about two stumbling, lumbering giants, each of whom can't seem to keep up with the nimbler Apple and Google, how can anyone expect that uniting them will produce some kind of positive synergy? (In other words, what's lateness squared?) Investors certainly are skeptical. Since the agreement was announced on Feb. 11, shares of Nokia (NYSE: NOK) are down 22 percent through Tuesday's close, while shares of Microsoft (NASDAQ: MSFT) have fallen just 4 percent. Nokia's been hit harder because investors arguably believe this is a desperation deal for Finnish mobile phone maker. New CEO Stephen Elop's "burning platform" memo -- leaked to the world a few days before the partnership was announced -- only fuels that perception. Of course, it's not just perception, it's reality. Nokia still may be the top mobile phone manufacturer in the world, but it's losing market share rapidly and is in danger of becoming an asterisk in the smartphone market. Its Symbian mobile OS was getting blown out by Google's Android and Apple's iOS, and it couldn't get MeeGo out the door. Nokia had to do something dramatic. Elop had two options: Cut a deal with Google that would make Nokia another manufacturer of Android phones, or embrace Microsoft -- where Elop worked before taking the top job at Nokia last September -- and hope that Windows Phone 7 can at least reach double-digit market share. I think he made the wrong choice. So do investors. So do many Nokia employees and customers. Elop has chosen to hitch Nokia's wagon to a broken-down mobile market horse, and for what? A billion dollars over five-plus years? Chump change for a company of Nokia's size. This might be crazy talk, but since "the final contract hasn't yet been signed," Elop really should consider walking away and getting into the Android game. Nokia would be dealing with a proven winner in the mobile OS market, and it wouldn't be held back by Microsoft's legendary product delays, glitches and general mobile device cluelessness. Sure, Elop might take some heat for appearing indecisive, but I bet Nokia shares would rise immediately. To me this is like a pending marriage that everyone -- including the two prospective life partners -- knows just doesn't feel right and will end badly. Better to call it off, awkward as that might be, than go through a whole lot of trouble and heartache. There you go, Stephen. I've provided the cover. Take it from here.

Chris Nerney writes about the business side of technology market strategies and trends, legal issues, leadership changes, mergers, venture capital, IPOs and technology stocks. Follow him on Twitter @ChrisNerney.

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