Microsoft platform support payments for Windows Phone, will slightly exceed minimum Nokia royalty commitments

Nokia filed its annual report yesterday. And almost every annual report from a public company usually has some interesting nuggets about state of things during the previous year.

Nokia’s 20F was no exception.

Though the risk section of the report is most definitely not the good part, even if many tend to focus on it. Most of the risk factors listed are  not even worth the time spent copy/pasting them into an article. Just go read the annual reports from Apple, or any other successful U.S traded public company. They may not list an asteroid hitting the earth as a risk, but they do list almost anything else they can think of, that may, however remotely, affect company stock price. They do it for legal reasons – to protect themselves from lawsuits in case the stock price goes down.

If anything – current risk factor description  in Nokia’s  20F Annual Report sounds much more realistic  then things Nokia used to put in there previously.

Getting back to the interesting things Nokia disclosed in 2011 Annual Report, there is a couple of them. More info about how the payments between Nokia and Microsoft are structured, and who will end up paying whom in the end. The second bit – is a hint of what Nokia Board thinks about Elop’s and Leadership Team’s performance last year.

We already know that Nokia is paying a per device licensing fee to Microsoft, and we know that Redmond started to send some substantial quarterly “platform support” money to Espoo. To the tune of  $250 million per quarter.

Until 20F came out yesterday, we knew little else. Now we do. According to the contract signed in April:

  • Nokia’s per device royalties are tied to:
    • the volumes of Windows Phones they ship. Presumably – per device royalty goes down as the Windows Phone shipments increase
    • the amount of engineering work Nokia commits to WP platform development. Which means that costs of  Nokia engineers developing features that become part of Windows Phone available to all, are subtracted from royalty payments
  • Nokia has substantial minimum annual software royalty payment commitments to Microsoft
  • Microsoft has quarterly platform support payment commitments to Nokia
  • The total amount of the Microsoft platform support payments is expected to slightly exceed the total amount of Nokia’s minimum software royalty commitments

Which all sounds like a pretty good deal for Nokia, with one caveat – if Windows Phone succeeds. If Microsoft mobile OS is not able to break the stranglehold iOS and Android now hold on smartphone market, everything else is moot and there will be no Nokia to talk about in a few years.

But, provided Windows Phone becomes one of the top 3 ecosystems, here are just few advantages Nokia now holds against any other Windows Phone competitor:

  • declining per device royalty costs, as volumes increase. Which will be particularly important competing in low price high volume markets
  • Nokia engineers are working on actual OS features and are able to influence the future platform direction towards what Nokia needs. And they are getting paid by Microsoft for the privilege, in the form of even lower royalties
  • until they reach some large volumes, Nokia gets Microsoft OS for free. In fact, Microsoft is paying Nokia for each Windows Phone shipped

When/if new strategy pays off, and Nokia starts moving lots of Windows Phones, they will start paying real cash to Microsoft for each device shipped. But then, those royalties will still be lower than rivals have in WP ecosystem. And per handset costs will probably be less than what others will end up paying in patent licensing fees, for each Android device.

A lot now rests on whether Microsoft and Nokia can make new OS a success when Windows Phone 8/Apollo ships. But if they do – Nokia has a pretty good chance to remain a very important player in true mobile computing device market.

For Nokia Board’s view on Elop’s and Leadership Team’s performance in 2011, tune in on Monday. A hint – they are satisfied, but not thrilled :)

Author: Stasys Bielinis

While I like to play with the latest gadgets, I am even more interested in broad technology trends. With mobile now taking over the world - following the latest technology news, looking for insights, sharing and discussing them with passionate audience - it's hard to imagine a better place for me to be. You can find me on Twitter as @UVStaska'

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  • http://twitter.com/allen_cross Allen Cross

    “… the one-time special CEO incentive program” (cf 20f p. 160; attmt. Item 6B)

    The Board of Directors decided in March 2011 that in order to align Stephen Elop’s compensation to the successful execution of the new strategy announced on February 11, 2011, his compensation structure for 2011 and 2012 would be modified. This one-time special CEO incentive program is designed to align Mr. Elop’s compensation to increased shareholder value and links a meaningful portion of his compensation directly to the performance of Nokia’s share price over the period of 2011-2012. To participate in this program, Mr. Elop invested a portion of his short-term cash incentive opportunity and a portion of the value of his expected annual equity grants into the program as follows.:

    – His target short-term cash incentive level is reduced from 150% to 100% and
    – His equity grants are reduced to a level below the competitive market value.

    —-

    Though neighborly of the Board to grant this revised compensation, I guess it’s not exactly a vote of confidence. It’s more like, “Ok, we’ll play along…for now.”

  • http://www.staska.net Staska

    Not really. The that board meeting to revise compensation happened last March, few weeks after Feb. 11th. And the decision on compensation was probably discussed and agreed with Elop way before that. 
    I wrote about it last March: 
    http://www.unwiredview.com/2011/03/31/elop-will-get-13m-euro-bonus-if-nokia-microsoft-deal-is-a-success/ Back then it seemed like a good deal to both Nokia and Elop. If his strategy succeeded – he was to gain 13M Euro it. Nokia shareholders would have gained way more.The amount of channel stuffing that went on at Nokia in Q4/Q1 was not yet known. The Symbian sales crash as a result of it was only to come in May/June. The decline in Q1 2011 more or less expected, with no idea that big part of those numbers were inflated. So the whole transition appeared more manageable then it actually was. 

    Much more interesting is the fact that the board saw fit to award almost 50% base salary bonus to Elop, and similar percentages to the whole leadership team. Which means that management hit and exceeded the minimum performance levels set by the board, but did not hit the full performance targets for the year. 

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  • http://twitter.com/hmmJD1 JD!

    Is the compensation received greater than the loss incurred by Nokia this year?

    Pls. note that Nokia was in profit last year! so that going down and incurring loss is something to be considered. I am not sure how successfull this strategy is !