Device operating systems

Nokia: How Microsoft Deal Could Fail

Nokia Corp. (NYSE: NOK) has exposed all the potential risks that could befall its partnership with Microsoft Corp. (Nasdaq: MSFT) in its 20-F annual report filing with the Securities and Exchange Commission (SEC) , which was published on Friday.

In what is basically a legal exercise to cover its back, Nokia has listed at great length all the things that could go wrong for the company in case the relationship with Microsoft turns sour. It’s a stark read. (See Nokia Unveils Major Revamp and Nokia to Cut Jobs, Stay in Finland.)

Publicly listed companies typically detail any and all risk factors that could affect their businesses. But for Nokia, the "risk factors" section of its annual 20-F document is extra weighty because of the uncertainty created by its strategic decision to partner with Microsoft and adopt the Windows Phone operating system as its smartphone platform. (See RIP Symbian & MeeGo: Nokia Ties Future to WP7.)

In the document, Nokia states that it expects the transition to Windows Phone as its primary smartphone platform to take "about two years." In the meantime, Nokia says it expects to sell 150 million more Symbian devices "in the years to come" and it will continue to develop MeeGo.

But the risks to Nokia are many, as the SEC filing reveals. Here are some excerpts from the document with the highlights:

  • "Definitive agreements with Microsoft for the proposed partnership may not be entered into in a timely manner, or at all, or on terms beneficial to us [Nokia]."

  • "The Windows Phone platform is a very recent, largely unproven addition to the market focused solely on high-end smartphones with currently very low adoption and consumer awareness relative to the Android and Apple platforms, and the proposed Microsoft partnership may not succeed in developing it into a sufficiently broad competitive smartphone platform."

  • "The Microsoft partnership may erode our brand identity in markets where we are strong and may not enhance our brand identity in markets where we are weak. For example, our association with the Microsoft brand may impair our current strong market position in China and may not accelerate our access to a broader market in the United States."

  • "We may not succeed in creating a profitable business model when we transition from our royalty-free smartphone platform to the royalty-based Windows Phone platform due to, among other things, our inability to offset our higher cost of sales resulting from our royalty payments to Microsoft with new revenue sources and a reduction of our operating expenses, particularly our research and development expenses."

  • "We do not currently have tablets in our mobile product portfolio, which may result in our inability to compete effectively in that market segment in the future or forgoing that potential growth opportunity in the mobile market."

  • "If we fail to finalize a partnership with Microsoft or the benefits of that partnership do not materialize as expected, we will have limited our options to build a competitive smartphone ecosystem with another partner or join another competitive smartphone ecosystem in a timely manner."

  • "Our mobile operator and distributor customers and consumers may no longer see our Symbian smartphones as attractive investments during the transition to Windows Phone. This would result in a loss of market share, which could be substantial, during the transition and which we may not be able to regain when quantities of Nokia Windows Phone smartphones are commercially available."

These are but a few of the risks that Nokia has laid out in black and white in its latest SEC filing, which can be read in full here.

Why this matters
This annual report shows how much time is not on Nokia's side in the smartphone market and to what extent the partnership with Microsoft is a make-or-break deal for the Finnish mobile-phone maker's smartphone future.

For more
The annual report was filed one month after Nokia announced its new smartphone strategy and the plans to partner with Microsoft. Here's more on this story's short history:

— Michelle Donegan, European Editor, Light Reading Mobile

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