Microsoft’s Windows Phone 7 Deal With Nokia Comes At $1 Billion Price

Microsoft (NSDQ: MSFT) won a huge new partnership with Nokia (NYSE: NOK) that could light a fire under its mobile division, but it will come at a price: over $1 billion.

The five-year agreement between the two companies–which somehow still hasn’t been signed–will see over $1 billion transferred from Microsoft to Nokia to encourage the production of Windows Phone 7 handsets, although it’s not all one-sided: Nokia will pay a licensing fee per handset to Microsoft that could eventually make the deal profitable for Microsoft, according to a report from Bloomberg. Still, the payments will start before the first Nokia Windows Phone 7 handsets arrive, which means that they’ll have to sell in decent volume for Microsoft to eventually see a payout.

It was pretty clear that Microsoft was going to have to pony up for Nokia’s business, as it competed with Google’s Android operating system business to score the largest phone design win on the planet. Nokia’s fortunes have waned of late against upstarts like Apple (NSDQ: AAPL) and Google (NSDQ: GOOG), but it still sells more phones than anyone and retains a well-known brand.

Another reason Microsoft was persuaded to make a deal was because of Nokia’s deep patent pool, which it is not shy about using. Practically everyone is suing each other these days in the mobile market, with Nokia targeting Apple and Microsoft targeting Android market Motorola (NYSE: MMI), and according to the report Microsoft’s $1 billion investment will give it access to Nokia’s pool of patents.

Seems like a lot of money, but as GeekWire’s Todd Bishop notes, it’s 5 percent of Microsoft’s profits from the last year. That’s a small price to pay if Nokia and Microsoft can turn their deal into a winner in the smartphone market.