Nokia 2012 Annual Report Download - page 86

We are contributing our expertise on hardware, design and language support to the Microsoft
partnership, and plan to bring Nokia products with Windows Phone to an increasing range of price
points, market segments and geographies. We and Microsoft are closely collaborating on joint
marketing initiatives and on a shared development roadmap on the future evolution of mobile products.
The goal for both partners is that by bringing together our complementary assets in software, search,
maps, location-based services, e-commerce, social networking, entertainment, unified communications
and advertising, we can jointly create an entirely new consumer proposition. We are also collaborating
on our developer ecosystem activities to accelerate developer support for the Windows Phone platform
on our mobile products. Although Microsoft will continue to license Windows Phones to other mobile
manufacturers, the Microsoft partnership allows us to customize the Windows Phone platform with a
view to differentiating Nokia smartphones from those of our competitors that also use the Windows
Phone platform.
Our agreement with Microsoft includes platform support payments from Microsoft to us as well as
software royalty payments from us to Microsoft. Under the terms of the agreement governing the
platform support payments, the amount of each quarterly platform support payment is USD 250 million.
We have a competitive software royalty structure, which includes annual minimum software royalty
commitments that vary over the life of the agreement. Software royalty payments, with minimum
commitments are paid quarterly. Over the life of the agreement, both the platform support payments
and the minimum software royalty commitments are expected to measure in the billions of US dollars.
Over the life of the agreement the total amount of the platform support payments is expected to slightly
exceed the total amount of the minimum software royalty commitment payments. As of the end of
2012, the amount of platform support payments received by Nokia has exceeded the amount of
minimum software royalty commitment payments made to Microsoft, thus the net cash flows have been
in our favor. As a result, the remaining minimum software royalty commitment payments are expected
to exceed the remaining platform support payments by a total of approximately EUR 0.5 billion over the
remaining life of the agreement. However, in 2013 the amount of the platform support payments is
expected to slightly exceed the total amount of the minimum software royalty commitment payments,
thus the net cash flows are still expected to be slightly in our favor. In accordance with the terms of the
agreement, the platform support payments and annual minimum software royalty commitment
payments continue for a corresponding period of time. We have recognized a portion of the received
platform support payments as a benefit to our Smart Devices cost of goods sold and the remainder as
a liability as part of accrued expenses and other liabilities on our balance sheet.
Continued Convergence of the Mobile Communications, Computing, Consumer Electronics and
Internet Industries
Value in the mobile products market continues to be increasingly driven by the convergence of the
mobile communications, computing, consumer electronics and Internet industries. As consumer
demand and interest for smartphones, tablets and hybrids of the two with access to a range of content
has accelerated, new opportunities to create and capture value through innovative new service
offerings and user experiences have arisen, with a greater emphasis and importance on software and
ecosystem-driven innovation, rather than standalone devices. These opportunities seek to capitalize on
various elements of ecosystems such as search services, maps, location-based services, e-commerce,
social networking, entertainment, communications and advertising. Capturing these opportunities
requires capabilities to manage the increased complexity and to provide an integrated user experience
where all these various elements interact seamlessly either in one device or across multiple devices
and, increasingly, other products such as televisions and game consoles. We expect these new
opportunities to continue to emerge in 2013. We aim to capture a number of these opportunities with
our strategy and partnership with Microsoft, including our collective goal to build a global mobile
ecosystem for smartphones. In Mobile Phones, we plan to leverage our innovation and strength in
85