Nokia Microsoft Deal

Ahead of its February 11 analyst day, Nokia (NOK) announced plans to adopt Microsoft’s (MSFT) Windows Phone 7 for its Smartphone OS. This step is likely a big positive for Qualcom (QCOM) with it benefiting in two major ways.

First, Qualcomm has 100% share of WP7 Smartphone which is based on higher-end Qualcomm Snapdragon processors. At present, Nokia does not use QCOM in its handsets in volume (aside from a smaller number of CDMA-based handsets). With this transition QCOM has much better chance to become a meaningful chip supplier to Nokia in the future.

Potential Impact: If Qualcomm gets 1/3rd share on Nokia’s Windows Phone handsets and Nokia Smartphone shipments stays at ~100mn annual run rate, this would be an incremental 33 million chipsets. This easily means additional 4-5% growth for Qualcomm’s chip business.

Second, Nokia pays the lowest royalty rate to QCOM in the industry because of prior patent transfers to QCOM and upfront 1x payments. As consumers become wary of buying Symbian-based systems due to longer term support/service issues, Nokia’s share is likely going to decline in the near to medium term. Any potential share loss by Nokia is a net benefit to QCOM as it should have a positive mix shift to QCOM’s royalty rate.

While the exact timing of these potential benefits is difficult to determine, QCOM is expected to benefit in mid to long term from the deal.