Although recent Nokia (NOK)-Microsoft (MSFT) deal was a significant positive for MSFT, its stock reacted negatively over the last few trading session. Investors are concerned over Microsoft’s investment in NOK-MSFT joint efforts as well as the long time lag in the Nokia-WP7 phone launch. In our opinion, these concerns are misplaced.
No Elop’s Billion: Nokia’s CEO Stephen Elop, in order to pacify investors, commented that Nokia would be getting "billions" and not "millions" from Microsoft in order to forgo its Symbian efforts. However, as more and more clarity is emerging, it appears like the value accruing to Nokia reaches "billions" only if soft costs, R&D savings and marketing around Windows' phone (most of which Microsoft was bearing anyway) are included.
There is a possibility that a small amount of new money is allocated because of the Nokia deal, but the large majority of marketing and development money has already been planned and included in company guidance.
Marketing budgets for WP7 were initially announced to be $1 billion or more, including development and marketing in the first year. Given the benefits Microsoft is deriving from this deal, it is likely that a meaningful portion of this annual budget will now be allocated to joint development with Nokia phones. However, since Nokia was unable to get any exclusivity from Microsoft; any benefit WP7 gets from the branding perspective will go to Microsoft alone in the longer term.
Timing of NOK-WP7 Launch: With no official guidance out on when exactly NOK-WP7 phones would hit the markets, speculations are rife. Initially, it was thought that only by 2013 any meaningful volume of Nokia-WP7 smartphones could hit the markets.
However, in a recent conference Microsoft CFO Peter Klein mentioned that first product could hit by Q42011 with a volume ramp up in 2012. This is much better than a 2013 ramp up in this fast changing (developing) industry.
From Feb 15th ISI Annual Conference - New York
HEATHER BELLINI: So, should we expect that the first Nokia Windows Phone 7 shipments will be kind of for holiday 2011, is that enough time?
PETER KLEIN: I think what we said is that's the target. There have been no commitments yet. Certainly, we've indicated that real volume will happen in '12, but certainly the idea is to get something out this calendar year.
We believe the stock market is significantly underestimating the benefits which Microsoft can derive from the deal. Nokia’s brand equity in fast growing emerging markets as a value for the money provider is significant. Even Google (GOOG) understood it and tried to woo it hard. We expect that once the market realizes that the concerns on the deal are overblown and the potential benefits to the Microsoft can be huge, Microsoft’s share price will outperform the broader markets in near term.
Disclosure: I am long MSFT.