Google earns money on Android apparently by licensing its apps and tangentially—but lucratively—through ads shown through Google search and other services. Microsoft typically has been in the business of licensing Windows to earn its money, and you'd think they'd like to do something similar with Windows Phone. But it seems that instead of having Nokia pay them for the privilege, Microsoft had to outbid Google for the reverse: ‘invest’ in Nokia for future profits via the Windows Phone platform.
You could argue that Microsoft's business plan here is
- Spend lots of money building Windows Phone
- Pay people to use it
Let's assume there's a little more of a rationale behind it.
One could hardly argue Windows Phone sales were spectacular to date. The number of phones that Nokia sells is larger than most (see the Symbian chunk of the Horace Dediu's graph of mobile platform marketshare), so there's huge opportunity here for Microsoft to cement Windows Phone in the market. The partnership with Nokia gives the platform a real future, and may even allow Microsoft—if they're smart—to extend the platform to the tablet space, where its OS offering is strikingly unappealing.
Without this Nokia deal, Windows Phone could easily have turned into the next Palm Web OS—great technology and original design without the critical mass to keep it alive. (But HP seem to know what they're doing with Web OS, now, so it's certainly not down-and-out.) Despite the costs for Microsoft, I think it was essential that they pay this gamble just to keep themselves in the game.
It's hard to state just how profound Google's effect on the mobile industry has been. Imagine where we'd be if Android had never come to life—the tablet market would be even more dominated by the iPad, and Palm's Web OS and Windows Phone would be the big contenders against Apple's iPhone. In this scenario, Microsoft would probably not be stuck in this unappealing situation of paying people to license their OS.
Google sure have thrown a spanner in the works.