Report: Microsoft Paying Nokia $1 Billion For Windows Phone 7 Alliance

Nokia announced a strategic alliance with Microsoft

Microsoft will pay Nokia more than $1 billion to develop and promote Windows Phone 7-based handsets -- a part of the five-year deal that wasn't disclosed when the two companies debuted their alliance Feb. 11, according to a Bloomberg Businessweek story that quotes "two people with knowledge of the terms."

Nokia will pay Microsoft a royalty for each copy of the Windows Phone 7 mobile operating system used in its mobile phones, but those costs will be offset as the $1 billion from Microsoft covers software research and development expenses, according to the Bloomberg story. The story also said the two companies have yet to sign a final contract.

Microsoft has been struggling to gain traction in the smartphone market against Apple's iPhone and devices from multiple manufacturers that use Google's Android mobile OS. Microsoft executives have said that more than 2 million Windows Phone 7-based devices have shipped since the mobile OS was released late last year.

The benefits to Microsoft of the Nokia alliance are obvious: Espoo, Finland-based Nokia is the world's largest handset manufacturer and its support for Windows Phone 7 should expand the software's market presence. "Microsoft is getting the platform boost that comes from acquiring a Nokia for about a billion dollars," the Bloomberg story quoted Colin Gillis, an analyst at BGC Partners.

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But the benefits for Nokia were less clear and some pundits wondered why Nokia committed itself to Windows Phone 7 rather than the popular Android. Nokia was also was involved in an alliance with Intel under which the two companies were developing a new open-source mobile OS called MeeGo.

With the news that Microsoft sweetened the deal with $1 billion, Nokia's role suddenly makes more sense.

A Microsoft spokesperson declined to confirm or comment on the Bloomberg story. That article said a Nokia spokesperson wouldn't comment until the contract is signed.